I attended MIT’s Lean Advancement Initiative (LAI) conference in Boston this week. The food was better than the typical rubber chicken and the weather was better than I expect from Boston, but what I found most memorable were the three overarching messages:

1. Market leaders are good at embracing enterprise change;

2. Enterprise change requires a holistic approach that engages all stakeholders. This includes employees, suppliers, customers, unions, and investors/owners;

3. Positive enterprise change, and hence market leadership, require a foundation of organizational factors that includes: shared goals, shared knowledge, mutual respect, frequent and timely communication, and problem solving communication.

Nothing new here, right? Drucker, Senge, Kotter, Peters, Collins, Liker, Womack and others preach similar messages about managing change and achieving excellence.

What strikes me is the forum. This is the Lean Advancement Initiative Conference. Instead of 6S, we discussed stakeholders; instead of one piece flow, we learned about organizational factors; instead of root cause analysis, we got relational competence.

The underlying lesson from LAI? To achieve market leadership, the bar is raised. Kaizen events on the factory floor and improvement projects conducted by experts are not enough. LAI is telling us that we must change the game from tools and projects to holistic enterprise transformation. We must cultivate leadership which supports and drives enterprise behaviors. We must develop towering professional competence in all employees through daily training, mentoring, and coaching. And we must value our employees as long-term assets whom we engage in the continuous improvement of our company.

Finger pointing, the blame game, excuses for unexpected or poor results…these are all too common behaviors in organizations today. Why is that?

Much of the reason is due to an organization’s intolerance for tactical failures and mistakes. If people know that regardless of intention and the soundness of strategy they will risk their reputation and maybe their job by admitting a mistake, then what behavior can you expect? Instead of sharing what is learned and creating a recovery plan, time and energy is spent on denial, cover up, and excuses.

I remember a scene from the HBO mini-series “To the Moon and Back”: While Grumman was testing the Lunar Excursion Module, its spider like landing gear frequently collapsed during simulated landings. This was a total surprise since the gear was designed with a generous safety factor. One evening while reviewing his work, the engineer responsible for determining the landing gear loads discovered that he made a simple yet large mistake in his calculations – resulting in an under-engineered landing gear design.

The next morning the engineer is in his boss’s office showing the mistake that he made. The boss then THANKED the engineer for finding his mistake quickly and bringing it to his attention. What behavior did the boss’s reaction encourage? It gave a clear message to the entire design team that he wants their energy focused on discovering problems and quickly fixing them as a team. He knew his team could not afford the time and energy needed for denial, cover up, and excuses.

Not long ago, I had a conversation with the hired CEO of a $200 million manufacturing firm, and I asked, “What’s your purpose?”

“Our purpose is to provide superior return for our stakeholders and market leading value for our customers” the CEO said.

“Ok, I get that. But tell me why this company exists. And tell me why you work here.” At this point, the CEO may have wondered if I was a lean consultant or communist. As our talk continued, it was clear that the CEO intellectually understood how his company’s products benefited society (every viable product does), but it was also clear that this was not that important for him personally. He was there mostly for the money and to build his resume. And his presence lacked passion (not to be confused with urgency – which he did express since he was not achieving plan).

So, why does an operations consultant ask questions about purpose? Over the years, I’ve discovered that one of the most telling leading indicators of success for a lean enterprise transformation (or just about any major change initiative, for that matter) is clarity of purpose.

For a senior executive, purpose is the answer to the question: Why? Why does your company exist? Why do you get up every morning and go to work? Why do you choose to lead this company?

It’s not a good indicator when the answer is some B-school gibberish about stakeholder return and value. As a front line worker, it’s just not inspiring to hear that your leadership team’s purpose is to make the owners richer.

My point is that a major change initiative requires engaging employees. Engaging employees requires a compelling, passionate purpose that your people can feel strongly about. It requires leadership that all stakeholders – employees, customers, investors, and suppliers - sense are genuine and authentic.

If you’re struggling with this message, then you will probably struggle with your lean transformation. Having a meaningful purpose really does make a difference.

So, what’s your purpose?

A COO of a large manufacturing firm lamented to me recently about the burden of assessments. “My plant managers see less and less value with the ISO, Baldrige, and corporate assessments.”

“Why is that?” I asked.

“Well, there’s a corporate requirement for semi-annual ISO assessments, plus and annual Baldrige assessment for each plant. It takes so much of their staff’s time, I think they feel it pulls them away from their work.”

“The goal of assessments is to show the path for improvement. Why would your plant management feel that this would pull them away from their work?” I asked.

“That’s just their point – the plants don’t feel that the assessments are helping them to improve. They view them as a grading exercise by corporate…just another bureaucratic reporting requirement.”

We then talked about the importance of adding value during the assessment process. And why this value must be perceived by those being assessed, not just by corporate. For example, if an assessment highlights that the daily management process is not well defined, go ahead and provide some training and coaching with daily management. In other words, offer help and coaching, not just a report card.

This is a recounting of a conversation I had with a plant manager about the financial impact of missing shipment of his product for that month (which since it was December, was also be a miss for the fiscal year). The lesson is an old one: be sure to do a marginal (incremental) analysis when assessing the impact of a change in revenue, cost, or profit, and be aware of how you handle allocated fixed costs.

Me: So you may miss shipment for 5 units this month? How will that impact the company financially?

Plant Manager: Well, cost accounting shows that the profit for this product is $50,000, so this may be a $250,000 hit to the company.

Me: I’m afraid the impact will be larger than that. $50,000 is the average profit per unit (writing on my tablet):

Profit = Revenue – Variable Costs – Allocated Fixed Costs

But, what’s the financial impact if you don’t ship a unit?

∆Profit = ∆Revenue - ∆VC - ∆FC

∆FC = 0 (these are fixed costs, and don’t vary with volume), so

∆Profit = ∆Revenue - ∆VC

So the impact to profit of not shipping a product is its incremental revenue less its incremental variable cost. You said that revenue per unit is $1,300,000 and its variable cost is $1,070,000, so the impact to profit of missing shipment will be $230,000 per unit.

PM: That’s over $1 million in lost profit for 5 units!

Me: Sorry to be the bearer of bad news, but remember that ∆Revenue - ∆VC is sometimes called “profit contribution” which is a significantly larger number than the “profit” that cost accounting attributes to a product.

And the impact to cash flow (what really gets some companies in a bind) may be even greater. For example, what if much of the raw materials for this product are already purchased and sitting in inventory?

The impact to Cash Flow (∆CF) would be:

∆CF = ∆Revenue - ∆VC + (inventory already purchased for that item)

PM: I get the idea, but I’m not even going to calculate that number. But I do have a heightened sense of the financial impact of not being able to ship a customer order.

Sage advice well stated from the Hardin-Simmons University web site:

“As a supervisor, do you listen to your employees? Take this test. Every Friday afternoon, write down three things that you learned from employees that week. Examples: An insight into customer service procedures; a better way to handle a process; reasons why a project did not work. There is a lot to learn from HSU employees. If you can’t list at least three things per week, make a conscious effort to improve on your listening skills.”