It is interesting to note that the prevailing system of management has been created by best efforts, without the knowledge that we shall learn in later chapters.
We pause here to ask what is the effect of
Hard work?
Best efforts?
Answer: We thus only dig deeper the pit that we are in. Hard work and best efforts will not by themselves dig us out of the pit. In fact, it is only by illumination of outside knowledge that we may observe we are in a pit.
Deming, Dr. W.E. The New Economics, 3rd. ed. (pp. 17-18)
THE AIM of today’s post is to provide my thoughts on what the top-management of our imagined client, Wyrmwood, could do to address their dire situation which I described in my previous newsletter.
To quickly recap, their CEO, Doug, is worried about the future of his company, seeing three threats:
First, rising inflation eating into the wages of his hourly workers due to rising fuel and cost of basic necessities;
Second, labour costs expended on employees who may not be aligned with their core values and underperforming management expectations;
Third, input costs increasing due to economic sanctions and high domestic costs.
Doug makes it clear within the first minute of his behind-the-scenes video that fiscal order needs to be restored, or the business could founder, and puts into motion a plan:
Increase prices on all products by 10% across-the-board;
Innovate on new products to “drive growth”;
Increase wages for hourly production-level workers on the shop floor who are productive, at the expense of cutting those who are not.
Source cheaper components (magnets) from China, despite the consequences to the economy;
Find new domestic suppliers for plywood that was sourced from Russia.
In our imagined engagement scenario, the leadership team have asked for our evaluation of their plan and our recommendations.
Rx #1: Learn New Theory for Improvement of Quality
While we’re definitely empathetic to the fiscal situation Wyrmwood management finds their firm, we’re not convinced that it is entirely the fault of inflation and sanctions on Russian imports, nor is the remedy to be found in bottom-line management and layoffs. Prior decisions, rooted in the prevailing philosophy of Management by Objective (MBO) and Management by Results have brought them to this point. As Dr. Deming observed long ago, “if you run your company on visible figures alone, you will have neither company nor figures, given a little time.”
Accordingly, we strongly recommend that top-management undertake immediate action to focus on the improvement of quality over the long-term, starting with learning a new theory of management. We will help them learn to apply Dr. Deming’s management method, beginning with the Chain Reaction to prime a virtuous cycle to reduce costs and increase profitability through whole-system improvements. This will necessitate learning how to make controlled changes through experiments using the Shewhart/Deming Cycle (PDSA) (Nov. 12/21 newsletter), along with understanding common-cause and special-cause Variation (Jul. 21/21 newsletter) and how to visualize signals within it using Control Charts (Nov. 5/21 newsletter).
It is important to emphasize here that our definition of quality is congruent with Deming’s, ie. it begins in the boardroom and is already baked-in to the product by the time any downstream QA takes place.
Rx #2: Pause Raises and Layoffs, Review Hiring Processes, Shop-Floor Management
While a seemingly noble gesture, we’re of the opinion that raising the pay of hourly wage workers in response to inflation and pricing it into products and “savings” from layoffs is misdirecting attention from where it lies: with top-management. We also cannot help but notice strong correlations between the CEO’s plan and the lessons learned in the Parable of the Red Beads, specifically the notion of stack-ranking and laying off below-average workers.
As explained in my July 14/21 newsletter, Who’s to Blame?, performance and productivity belong predominantly to the system, which is the responsibility of management to improve, thus rating and ranking employees for layoffs is, as Dr. Deming observed, an overt abdication of leadership. However, we do agree savings could be found in this time of crisis, starting at the top. As Dr. Deming notes in The New Economics:
In the United States, the last ones to suffer are the people at the top. Dividends must not suffer.
In Japan, the pecking order is the opposite. A company in Japan that runs into economic hardship takes these steps:
Cut the dividend. Maybe cut it out.
Reduce the salaries and bonuses of top management.
Further reduction for top management.
Last of all, the rank and file are asked to help out. People that do not need to work may take a furlough. People that can take early retirement may do so, now.
Finally, if necessary, a cut in pay for those that stay, but no one loses a job.
Deming, Dr. W.E. The New Economics, 3rd ed. (pp. 20-21)
In addition to adhering to this guidance, which should re-emphasize Wyrmwood’s constancy of purpose for the long-term (ie. to stay in business, create jobs), we also advise looking for opportunities to work with employees to understand why they appear to underperform and either help them to improve or move to other duties they are better suited for, as explained in my Aug. 9/21 newsletter, Variation in People.
We’d also strongly advise reviewing Wyrmwood’s hiring policies and practices to better understand what contributing role they play in, as Peter Scholtes famously observed, either the hiring of dead wood, or live wood and killing it.
Rx #3: Look to Create Long-Term Agreements with Fewer Suppliers
While Doug’s observation that labour costs are their largest expense is undoubtedly true, even larger expenses can come from procurements awarded on the basis of price tag alone (See Point #4 of Deming’s 14 Points for the Transformation of Management) such as rework, defects, or failure to meet delivery schedules. While extenuating circumstances have played a part in disrupting production, we advise using this as an opportunity to build strong relationships with domestic suppliers and to work with them on methods to reduce costs. This will require commitments to each other over the long-term. As Dr. Deming advises in The New Economics (3rd ed.)
[A] supplier must be assured of a long-term relationship with the customer in order to make his contribution toward optimization of the system…
The idea of several suppliers for any one item, competing with each other, competing with each other for lower prices (as advocated by some authors) makes good talk, but as a practical matter it is only talk, even under long-term contracts. It destroys any possibility of a good relationship between customer and supplier. The losses would be one of those unknowable figures.
(p. 207)
Rx #4: Price Increases, Innovation
While we still recommend to reduce costs and prices through improving quality, we recognize that in the near-term raising prices may well be unavoidable. Our recommendation is to not use the raising of prices to cover raises and layoffs, but to adjust to increased input costs while looking to making whole system improvements, including working with suppliers over the long-term on quality to bring costs down.
With respect to innovation, we agree: New products are needed, but not just because of financial pressures in the short-term, but for the long-term viability of the company, and it’s apparent this is where Wyrmwood shines. We accordingly recommend enabling everyone in the company to contribute to this effort, not just titled product designers and managers. Also be aware that the innovations you require are not just products, but improvements to the way you work together. In this regard, we’d remind you that some of your best ideas could be leaving with the people you’re about to lay off.
Acknowledgement and Reflection Questions
I’d like to thank Eric Overton for his suggested Rx. to Wyrmwood’s problems which he contributed in the comments in the prior newsletter post. They are complementary to the ones I list above and are much more succinctly-stated.
Given the case study and my suggested Rx, what are your thoughts? Are the recommendations realistic? Do you believe that they could redirect top-management’s energies away from Management by Objective quick-fixes and toward whole system improvements? Would they promote a commitment to constancy of purpose for Wyrmwood? What possible benefits or consequences could accrue? To what extent does the state of the economy give them a free pass? What else could they do without outside knowledge or help? What else would you advise?