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Lean Roadmap Newsletter
Becoming a World Class Enterprise 
8th Edition
Greetings!
 
This edition of our newsletter begins with a follow-up to our Daily Management article from our last edition.
 
Also, we will begin our discussion on How to Prevent Lean Implementation Failures - 10 Reasons Why Failures Occur. We will discuss, from the least critical (Reason #10), to most critical/fatal (Reason #1) why Lean implementation failures occur. Today we will discuss Reason #10:
  • Bonus Pay Systems Where the Only Measure is Company Profitability

Chicago Area Free 2 Hour Seminar - Policy Deployment & Lean Implementation Planning

 
The Most Powerful Lean Activity Your Organization will ever Accomplish!
 
When: Thursday, June 11th from 9:00 - 11:00 am
Where: Hampton Inn, Chicago-O'Hare (Schiller Park, IL)
I-294, exit Irving Park road, west to Mannheim road, south to 3939 N. Mannheim Rd.)
 
Free Hot Breakfast
 
Seats are Limited, Registration Required: Email kelly@wcmfg.com, or call 260-637-8064
 

Daily Management - Continued from Previous Edition

The Value of Standard Work
by Mattie Watson
In our last newsletter, Vince stressed the importance of Daily Management - the daily performance of business fundamentals required for an organization to serve customers and be profitable. Specifically, without the discipline of Daily Management, Lean, or any other type of improvements, are not sustainable. Considering the cost in time, labor, and dollars to make these improvements, can we afford to lose the gains? 
 
The definition of Daily Management is not hard to understand. The difficulty lies in translating it to action. What are some specific Daily Management activities? There are many, but in this issue I would like to focus on a specific action that addresses the following symptoms of poor Daily Management that Vince identified: 

- Quality problems and incidents increase when vacation or other relief workers are employed.

- Process performance is noticeably and quantitatively different from shift to shift.

- Different associates run the same equipment differently.

- Problems in key performance areas have been solved numerous times only to return after a short absence.

- Processes are run to the best of the associate's ability and adjustments and corrections are made based on judgment (as opposed to data).

- When "seasoned" employees change jobs or retire, problems spring up in the area they left.

- Process performance modification and control is not documented empirically.
 
Sound familiar? Most organizations suffer from the majority, if not all, of these conditions. These issues can be significantly reduced (even eliminated) by implementing Standard Work. Standard Work tends to be something every organization wants to have but no organization really wants to do. 
 
As an organization starts its Lean journey, the sheer volume of procedures needing to be written or updated can be humongous. Who has time? Yet we always have time to do the job over when something goes wrong (see symptom #7 above). Why not invest the time to correct the procedures and prevent the error from the start? 
 
Here are some hints for approaching the daunting task of creating or updating Standard Work procedures.
1. Start with a single area, part number, process, or machine.  Make the selection based on the biggest return for the investment in time. Which process or machine creates the most scrap/ rework?  Which part has the most customer returns? Which process varies most in quality or output? Which problem has been "solved" repeatedly?
 
2. Once the process to be standardized is identified, select the people to work on documenting it. If it is not feasible to get associates from all shifts together, select one associate and document what that person does.
 
3. It is best to have someone relatively unfamiliar with the process do the documenting. Do not use your "best" associate as this person may not even be aware of all the things he or she knows about the process and may inadvertently leave out some key information. Someone unfamiliar with the process can ask questions and clarify steps that may not be intuitive to someone less experienced.  Use pictures.

4. Have the associate verify the written instructions are accurate by simply following them exactly.  Once the instructions are initially approved, have at least one associate from the other shifts review the instructions (if they were not involved in the original process documentation). Incorporate ideas and feedback into the procedure until all the primary associates agree to the process as written and commit to following it every day.
                                                                                                           
5. Train anyone who performs the process on the new procedure. Use the written instructions whenever training for the job is done.

6. Post the instructions in a convenient location so associates can reference them easily.
 
7. Update the instructions (following steps 2-6 above) as improvements are made to the process.
 
8. Follow up!  Make sure the instructions are posted and being followed - especially after the initial introduction. Do this daily for the first two weeks and 2-3 times a week for the next two months. This is the Daily Management part of Standard Work that will cement the desired behavior.
 
Once the first few procedures have been written, more associates can be involved in the process. This task is not the responsibility of one person. Use the first procedures as templates and train others in the process.
 
Standard Work may not completely eliminate the symptoms listed at the start of this article. Other factors such as unclear quality standards, skill levels of associates, incapable equipment, or lack of maintenance, may affect outcomes. However, by documenting what is currently happening, these other issues will likely surface and can then be addressed. 
Why Lean Failures Occur - Reason #10:
Bonus Pay Systems Where the Only Measure is Company Profitability  
How to Prevent Lean Implementation Failures 
by Larry Rubrich
  
To clear up any confusion in Reason #10's title, companies can only pay bonuses when they are profitable! It is the basis from which bonuses are developed where the problems exist.
 
In fact, we believe most companies are too meek about profitability. Companies have a right to a certain level of profitability determined by the amount of risk to the invested capital. Don't apologize for that! Without this right, everyone would just sell their businesses and put their money in some other investment! Profit sharing-no! Gain sharing above the minimum expected level of profitability-yes!
 
The problem with bonus systems that are tied only to the level of profitability is that they do not teach the company associates how to link and align what they do to profitability.  The reason no bonus was produced then becomes a finger pointing exercise because our associates do not know where profitability comes from.
 
It should be noted the implementation of a bonus system should not be attempted before the third year of the Lean implementation which uses Policy Deployment. Policy Deployment educates the company associates in the organization's goals and how they can use Lean to help the organization achieve its goals. It is this "cause" (use Lean to make specific, measurable  improvements) and "effect" (help the organization achieve its stated goals) that all associates must learn or they will point fingers at everyone else except themselves when there is no bonus payout.
 
Self-Funded Bonus System Goals
 
The goal of a bonus system is to help align and link the company goals and the associate's goals.
 
Reduced costs is one of the outcomes of a World Class/Lean Enterprise implementation. Bonuses should therefore be tied into the organization's cost drivers. The actual bonuses should be funded by the reduction or elimination of these drivers (convert all drivers into dollars). Which cost drivers you work on first are identified in Policy Deployment. This means that paying bonuses must be one of the organization's goals since effective Policy Deployment requires that there be no other Lean improvement activities going on in the organization other than those established in the Lean Implementation Planning Step of Policy Deployment.
 
Some potential cost drivers are shown below: 
 
 Cost Drivers
 
A Pareto chart of the organization's cost drivers can help decide the order of attack.
 
Remember, two of the prerequisites for teamwork to occur in an organization are common goals and common mission/purpose. If bonuses are to be used to align the company's goals and the associate's goals, it must be a team activity, either everyone earned a bonus or nobody earned a bonus. 
 
Other Bonus System Notes
  • This bonus system cannot be operated "outside" of Policy Deployment.
  • Associates should know what the company's expected level of profitability is
  • Select a maximum of five cost drivers that will be measured and tracked. Unless the organization has a "perfect" safety record - one of these must be safety.
  • Start with an 80 (company) -20 (associates) bonus split on dollar reductions produced. For example, if scrap reduction was one of the targeted cost drivers in Policy Deployment, and the organization reduced scrap by $200,000 in the first year, then the split would be $160,000 to the company and $40,000 to the Associate bonus pool. Reduce this split to 50-50 as improvements are made and the potential bonus pool is reduced.
  • Payouts should be a maximum of quarterly while still protecting company's right to profitability. Hold-backs are okay.
  • If a bonus system is already in place, this system should give the possibility of  a greater payout .
  • In the 5th-7th year of the bonus, the system will have diminished many of the cost drivers. It may be necessary to switch at that time to a true profitability "gain sharing" system which can be successful at this point since all the Associates will understand bonus "cause and effect." 
  • Keep an up-to-date posting of the bonus status.  

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Next Issue Articles:

  • Why Lean Failures Occur - Reason #9: Using Kaizen Events as Your Sole Improvement Mechanism                       
  • Team Killing 101
 

The Most Powerful Lean Activity Your Organization Will Ever Accomplish!

 

    Don't forget to register for our free seminar!

Upcoming Lean Events & Activities - Registration is Required (unless noted, all activities are free) 

June 11th - Policy Deployment & Lean Implementation Planning - Hampton Inn, Chicago O'Hare, 9-11 am
 
Concurrent Sessions:
  
 
July 14th - Introduction to Lean Healthcare - South Suburban College (IL), Oak Forest Campus, 9-11 am
 
July 14th - Policy Deployment & Lean Implementation Planning for Healthcare - South Suburban College (IL), Oak Forest Campus, 9-11 am
 
Concurrent Sessions: 
 
August 4th - Introduction to Lean - South Suburban College (IL), Oak Forest Campus, 9-11 am
 
August 4th - Policy Deployment & Lean Implementation Planning - South Suburban College (IL), Oak Forest Campus, 9-11 am
Larry Rubrich
WCM Associates LLC
2009 WCM Associates
 
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