Archive for the ‘Managing risk’ Category

Risks and innovation

January 19, 2014

In 1979, Daniel Kahneman and Amos Tversky won the Nobel Prize for Economics for their “Prospect Theory: An Analysis of Decision under Risk”.

This theory shows that we prefer certainty to taking a risk. We see this on auction sites where the “Buy It Now” price is often much higher than the price of similar items sold by auctions. The BIN price may influence the bidding but it is for those of us who are willing to pay more for certainty.

Stable, well-established organizations tend to be risk averse. They place great value on their stability and choose continual improvement instead of innovating. Indeed, most organizations with process-based management systems continually improve their goods, services and processes. Some also go beyond development to design something entirely new.

Sustainable organizations do both; they continually improve and they innovate to find new ways of fulfilling their missions.

Successfully managing risk implies formal largely predicable processes. Being innovative tells us that selected team members interact in an informal free-thinking “sandbox” of collaborative effort. How do process-based organizational management systems help their leaders to manage innovation and the risks inherent to innovation?

First, let us never forget that effective process-based management systems deliver a valuable resource: time. By preventing problems, the management system substantially reduces time wasted on firefighting. The organization has time to innovate. Secondly, remember the leaders who serve to lead. Such leaders remove causes of fear from their systems. Their words and actions earn trust by selflessly taking responsibility for helping employees to understand and fulfill stakeholder needs. In this supportive environment, noble causes can stimulate innovation to find new ways of creating successful stakeholders.

The leader challenges and authorizes the special innovation team that comprises accomplished problem solvers. Unlike capable processes, innovating requires the leader’s patience and to expect to “fail” many times. Of course, knowing what does not work is not really a failure. And so-called failures may be successful in completely unexpected ways. Think Post It Note®.

Innovative teams comprise a mixture of different types of people with a wide variety of talents. Instead of endlessly talking, the team creates prototypes as soon as possible. Prototyping a new service may require a focus group. The team allows for the fact that focus groups usually comprise people who favor certainty. The prototype must impart value by solving a costly problem.

A shared understanding of the costly problem is a vital input to innovating. In bringing the innovation to market (internally or externally), successful organizations decide which innovations yield the greatest benefit to stakeholders. They determine which innovations have the greatest chance of success. The latter stages of innovating show that innovating is a process that really is design rather than development. It is a process that includes such risk assessment techniques as SMEA (Success Modes and Effects Analysis) and FMEA (Failure Modes and Effects Analysis) before verifying and then validating the design.

Of course, risk has an upside. Nevertheless, risk managers tend to manage risk to avoid loss instead of managing risk to add value. Prospect Theory can help them to understand this. By fully appreciating risk, we recognize and manage both the downside and the upside of our decisions including our decisions to innovate.

In responding to a recognized adverse risk or threat, we use our management system to avoid, accept, transfer and mitigate aspects of the threat. Similarly, we respond to a recognized positive risk or opportunity by using our management system to share, enhance, accept and realize the opportunity.

Knowing Kahneman and Tversky’s Prospect Theory, we can dissolve the fear that would otherwise stop us from making difficult investment decisions. Organizations can enjoy the thrill and rewards of innovation by recognizing the value of taking positive risks that are essential for sustainable organizations to create even more successful stakeholders.

Effectiveness, value then efficiency

December 10, 2013

All of us have a responsibility for achieving more with less. To be more efficient, we experiment to see what works for customers, what nearly works and what does not work.

Organizations should start by studying themselves as systems. Once their leaders understand how their system helps employees to fulfill their mission or not, they think and work differently. They start their efficiency improvement cycles by developing their management system to drive their processes through the walls of silos to focus on customers. Then they can focus on improving the system to deliver what customers value.

Given an environment that supports such thinking, together with our colleagues, we start the experiment by studying customer demand, what customers’ value and waste. We may then set ourselves a hypothesis to test the best way to satisfy value demand and reduce failure demand. We carefully work to our new or updated procedure to see if it is effective. We try again until successful. We institutionalize the successful new process so others in the system can depend on it. This also enables us to improve efficiency further with another cycle of improvement.

Improvement often starts by eliminating the local causes of problems from a process. Perhaps by mistake-proofing the riskiest processes too. But, after several improvement cycles, we find the wider system has the greatest impact, both adverse and beneficial, on our process. System-wide impacts come from other processes in the system. These impacts include the shared organizational beliefs (or culture) that leaders reinforce or weaken with their processes.

When the continual improvement cycle is effective it continues to make the system and its processes more efficient. The speed of this investment should be a result of the calculation of risk and reward on behalf of investors who share the mission for customer value. The management system should deliver the information needed for these risk-reward decisions from the data collected on what customers’ value.

Conformity is necessary for effectiveness and predictable effectiveness is necessary for delivering value and improving efficiency. Predictable outcomes are a mark of effective processes and systems. “Luck” best describes an organization happening to fulfill a requirement with an unknown process or system.

Start by understanding your organization as a system. How does it help your organization to fulfill your mission? What are the leadership processes? Be prepared to think and work differently. Start your efficiency improvement cycles by developing your management system so it is process-based leaving no silos. Then focus on improving your system and its processes to deliver what your current and future customers value.

What level of human error is acceptable?

September 17, 2013

Even competent humans make mistakes. Mistakes may not result in failures to meet requirements. Some systems evolve to become tolerant of mistakes or some organizations employ their management systems to prevent nonconformity.

The only bad nonconformity it the one we do not know about.

Understanding this fact is the key for leaders and their managers being careful not to create a culture that hides nonconformity.

Even so it is common for managers to demand no mistakes and to react badly to errors.

Leading organizations provide employees with management systems that help them to understand and fulfill the requirements. And servant leaders provide a management system to help their employees to eliminate the causes of nonconformity. They do this gradually, according to the 80:20 (or 50:4) rule, so they always start with the vital few nonconformities that cost the most.

Zero Defects (zero nonconformity actually) has to come with humble managers who take responsibility for their management system causing the nonconformity. Care and respect remain to most powerful parts of such management systems. It should not require courage for employees to talk about problems in doing the right work right.

These organizations welcome nonconformity reports to show where the management system needs further improvement to prevent failures to fulfill requirements. They know the only bad nonconformity is the one that remains hidden.

How do I develop my organization’s management system?

August 5, 2013

As Quality Manager recognize that your organization already operates according to its management system. Recognize that quality is primarily the responsibility of the people doing the value adding work. Also recognize that an individual’s performance is largely determined by the system in which that individual works.

Understand the organization as a system. Define the scope of the system. Assess its strengths, weaknesses, opportunities and threats. Determine system objectives. Analyze what the organization does with its suppliers and customers to turn customer needs into cash in the bank. Determine the cross-functional key processes from the core process and as necessary to sustain and direct the core process. Assign and brief the process owners.

Analyze or design the key processes and their interactions. Obtain feedback (reality check or feasibility check) from the process teams. Incorporate feedback in the process descriptions (procedures). Correct minor nonconformities within two weeks (and issue corrective action requests for any remaining nonconformity). Train process teams in their new processes and in any new controls for existing processes.

Train leaders to run the management system awareness sessions so employees can see they are committed to requirements coming from customers, regulators and their management system. Have them promise management system performance reports.

Facilitate improvements of the system, its processes and products. Audit the management system for how well it helps employees to determine and meet requirements. Facilitate reviews of management system performance with top management so they initiate the changes necessary for their management system to improve the organization’s efficiency and effectiveness.

Monitor top management’s engagement of employees in the use and improvement of their process-based management system to fulfill the organization’s purpose or mission.

Thriving instead of just surviving

July 4, 2013

Thriving companies make effective use of resources to create successful customers. Zombie companies earn just enough to pay the interest on their debts. Low interest rates allow zombie companies to exist without investing in new products, processes and their management systems. As interest rates rise, the zombie companies will disappear unless they act now.

How do companies stop surviving and start thriving in this economy?

Refocus on your mission:

Your company’s mission is the reason your company exists. It is the system’s purpose. Cutting everything by 20% or more may be instinctive but without regard for the mission, it will put the system, your company, into a death spiral.

Instead, be creative. Your core process (from customer needs to cash in the bank) is mission critical. Determine the vital few changes that will yield most of the efficiency improvements.

Study your marketing and selling process. Perhaps you can go viral via social networks to explain clearly how your company creates successful customers. Study your innovation process. Do you fully understand, from the customer’s point of view, each of their objectives? Then design creative solutions with superlative service (see below) to help each customer to fulfill their objectives. Sell the value as seen by each customer but do not cut prices. Use your management system to improve efficiency and reduce costs but do not offer discounts.

Superlative customer service:

Companies often focus their management systems on tangible goods. Indeed, for nearly three decades, accredited registrars have encouraged their system certification clients to ignore their service design processes!

Leaders know that superlative customer service can influence each customer to buy on value instead of price.

Study your product design process. Ensure it designs the whole experience the customer has with your company. Engage your employees in the redesign of their interactions with customers by analyzing the customer’s experiences as they are. Agree upon the service changes so they are as they should be from the customer’s perspective. Make this new process part of your management system by changing the affected processes such as training, selling and maintaining the computer network. Continually improve the customer experience with your management system.

By engaging your employees in the redesign of their interactions with customers, you inspire them so they help your company to thrive again.

Is defect the same as nonconformity?

March 9, 2013

Defects adversely affect the functionality of the product; indeed the defective product may be dangerous. A product’s nonconformity is a failure of a characteristic to meet a requirement. Defective products are therefore more serious than other types of product nonconformity. The gap between the two (defect and nonconformity) is wasteful but a margin of safety is necessary because designers and customers seek assurance of safety, reliability and durability but both have limited information about the actual performance of materials, structures and subsystems in a wide variety of operating conditions.

Surely, because of these unknowns, we have to treat product nonconformity as if it were a defect? Therefore, defect and nonconformity may differ but we treat them the same way in that they must be corrected and that we should learn from them to improve our management systems.

In the continuum from an outcome being defective to perfect, we could usefully think along the following lines:

1. Defective – outcomes may injure or kill someone
2. Nonconforming – outcomes fail to meet a requirement
3. Quality – outcomes fulfill customer requirements
4. Excellent – outcomes exceed the needs of customers
5. Perfect – an ideal many choose to pursue

Meanwhile it is reasonable to expect designers to continue to improve their processes and product specifications based on their understanding of the actual performance of materials, structures and subsystems. This knowledge can be used to close the gap between defect and nonconformity.

Yes, designers must also address service quality or the customer’s feelings. Customer feelings are among the needs translated by designers into product requirements. Consequently, they appear in the product specification not as customer feelings but as product characteristics. We may prefer our tea served with love. The designer knows this but the service specification remains silent on this point so as not to sully the love characteristic of the service by specifying “serve with love”. This is why training is the key to excellent customer service. Designing the service part of the product remains an intriguing area of research. Of course, we continually learn more about product design and delivery by listening to the customer’s perceptions about how well their needs were fulfilled.

Differentiating clearly between an acceptance criterion (a requirement) and a blemish or deviation from perfection remains a difficult quest but we are on the other side of that continuum when we are talking about the difference between a defect and a nonconformity. From an engineering or design point of view, specifying the requirements that enable everyone to uniformly differentiate between 1, 2 and 3 are seen as the most important. Between 3 and 4 we have a point where customer needs become their new requirements. Some companies, such as Apple, anticipate or stimulate this transition point from hidden needs to requirements that drive customers to buy their products better than most. This may be due to the designers being very close to, if not the same as, the more futuristic customers.

What is the value of quality?

January 4, 2013

Some organizations survive by reducing their price of nonconformity from 40% to 20% of revenue. These organizations inspect and audit to stop bad quality from reaching the customer. Reducing the price of nonconformity (PONC) is their laudable quest. If the organization served no customers or delivered no product, PONC would be zero! Quality management therefore requires another metric.

The term “value of quality” makes us think about this. Customers pay for whatever they value. They buy when they are confident that what they buy will fulfill their needs. These needs include affordability. Therefore, we manage quality to deliver value. This includes preventing loss.

Organizations prosper by ensuring they add value faster than their competitors do. They ensure their organizational management systems enable employees to add value quickly. Organizations apply this thinking (summarized as $ per millisecond) when developing, using and optimizing their management systems to deliver more value even faster. Consequently, they can earn a lot more with services and products that are highly valued by more customers.

Leading organizations design, make and deliver services and products that exactly fulfill the needs of their intended customers. They avoid waste in hitting this target. They learn of new needs and new ways to add value – faster and perpetually. They know that sorting good product from bad (aka inspection) slows the velocity of adding value. They know that falling short of customer needs wastes valuable resources. They know that exceeding customer needs, in terms of what they value, increases costs without reward. They may reach a design dilemma: features that do not fulfill customer needs are a waste but delivering more features than customers initially say they require may expose needs not fulfilled by competitors.

The product and its outcomes may include the customers’ wider perceptions of value. Customers used not to care how well their favorite company treated its suppliers or paid its taxes. Increasingly even the most loyal customers care enough about any suffering in how the product is made. Imagine destroying a valuable brand by misusing it as a tax dodge. Customers and employees care about global organizations paying taxes where they work and live. They value social responsibility enough to influence their buying decisions and their career choices.

Hence, quality includes value as perceived by our customers as well as services and products free of nonconformity. Organizations develop, use and improve their management systems to enable employees to add value faster while preventing loss sooner.

Why always seek to reduce variation?

December 13, 2011

Thanks for asking why we should always seek to reduce variation (after taking the actions mentioned earlier).

Agreed, innovation in revealing and fulfilling yet more customer needs (including the psychological need for expectations to be satisfied) is indeed the key to success in a consumer-driven economy.

So is the design and operation of reliable production processes through mistake-proofing.

Unreliable processes may cause the people involved to increase the amount of work in progress “just in case” something goes wrong with an earlier process (or be idle).

Customers are expected to pay directly for this wasted inventory (and time) up and down the supply chains. The rest of us pay the avoidable environmental costs of waste.

Competitors with reliable processes waste less so they can afford to reduce their prices while making more profit to share with employees, shareholders and as taxpayers.

Competitors with reliable processes may yield more as taxpayers, attract more investment and attract more creative employees for innovation.

Our economy (some of the taxes could be invested in educating and training people for more creative and fulfilling lives) and our environment thereby benefit from reliable processes. .

Hence, we can see a virtuous cycle arising from the widespread design and operation of reliable production processes to result in products that fulfill the needs of paying customers.

Processes with more dependability should be a result of developing and running process-based management systems.

Within these systems people may cost effectively eliminate the “vital few” special and common causes of variation after designing to eliminate causes of nonconformity.

Such is the importance of organizations running reliable processes to result in needed goods and services.

Users need manuals they understand

October 6, 2011

Generally, people do not read their quality manuals. This is not new. IT has realized this for years with their helpdesk’s less than helpful responses “have you read the manual” or “have you rebooted your computer yet”.

Some quality manuals are full of many turgid policies. So, does the failure to read and understand the quality manual reveal a lack of interest? More likely experts write their manuals without total regard for the readers.

Many experts rewrite the system standard. This fails to respect copyright even as we try to protect our own property. It is not a manual that meets the needs of its readers.

Instead, write your manual so it explains how your management system works to:

A. Convert the needs of customers into cash in the bank;
B. Manage opportunity and risk (add value while preventing loss); and
C. Continually improve performance.

Use the present tense to reflect reality and rewrite for Grade 8 readability. Just like the Wall Street Journal (and this post).

You may include the one policy statement as an exhibit. Write just one for quality, health and safety, security and sustainability.

Then train the leaders to explain to the employees the benefits of their management system. Help the leaders understand its obligations on the leaders and on the employees. Help them to explain the benefits of using the management system. Help them to develop their presentation, handouts and any other materials. Help them to plan and deliver the employee awareness campaign.

You want to make your manual friendly to auditors? Include a conformity matrix as an exhibit for each management system standard. Competent auditors do not need a rewrite of the system standard.

Write your system manuals to enthuse the leaders and employees. Encourage them to understand, use and improve their management system.

$ per millisecond

August 31, 2011

How fast does your organization add value?

All work should help other people. In this context all work is service. We also know that all work is process. Work should add value or enable another process to add value. When our work depends on the successful interaction of several different functions we need a management system to help us so we are all doing the right things the right way at the right time.

Besides paying customers, our communities, our families, our colleagues, ourselves and our employers – the people receiving the results of our work are stakeholders.

Management systems should inform us of the requirements critical to success. Management systems should deliver to us, on-time and defect-free, the inputs to which our work must add the value. Management systems should deliver the necessary resources and controls so we understand and can agree customer requirements. As part of the management system leaders coordinate our work and cause all of us to care passionately for each other’s requirements.

In short, the management system enables us to earn a living and our organizations to exist.

Sometimes our system slows us or stops us from adding value because its core or support processes, the inputs, resource or controls are late, ineffective or defective in some other way.

Two questions remain: “how fast does your management system enable your core processes to add value and what are doing with your management to hasten the rate it adds value?”