Service level: is it just a KPI?

What is your company in business for - to make money? I know that was the answer in the book The Goal, however, I have seen many mission statements and none of them say that. Money is a result of fulfilling the company's mission. In the sequel to the book The Goal, Dr. Goldratt tells us that a good strategy has three necessary conditions. In the last chapters of It's not luck, Alex's discussion with the directors leads him to conclude that the three pillars of a good strategy are: to generate a good environment for employees now and in the future; to provide excellent service to customers now and in the future; and to generate good returns for shareholders now and in the future.

Any mission should be consistent with these necessary conditions.

Where does it all start?

It is easy to realize that without sales there is no business. And that, with competition, we must build a competitive advantage that makes us stand out and makes sales flow based on value exchange.

All companies that are selling something have managed to build an offer composed of a product that has an attractive price/quality ratio. Otherwise they would not sell.

Designing or finding those products, then producing or buying them, making good packaging, producing attractive marketing materials, investing in advertising, deploying the sales force; all this is a big effort in time and money.

And the promise made to the market consists of the product, the price and a delivery condition. Delivery may be by promising a date, or it may be by promising availability at the point of sale.

Everything starts by making an attractive promise and customers accept it, generating sales.

What happens when the promise is broken?

Sales do not stop immediately. There is customer frustration that results in customers looking for alternatives. But let's look at which part of the promise is most frequently broken.

Neither the product is frequently degraded nor the price is frequently altered. These two aspects are very much taken care of by the companies.

It is common for delivery to be missed, either by failing to meet the promised date or simply by generating a stock out at the point of sale.

Competitors are not much better at delivering, but this only generates more frustration.

Perhaps the most damaging effect is within companies. Failure to deliver immediately generates complaints from the market, which translates into emergencies, rescheduling, cost overruns, and a lot of stress.

How do you feel when you miss a delivery deadline, or when more than 10% of your products are out of stock in the stores? These facts generate a ripple of pressure throughout the organization. At least I'm sure they are not a source of satisfaction for anyone.

What if a competitor had a much higher level of service? Sales would likely drop and margins would erode. No one is happy now.

The cause of failure to comply

The consequences of not fulfilling the promise are many and negative, as we already sensed.

And it is enough to have a little experience to know that failures to deliver are very frequent.

Why is it that, knowing how bad it is for everyone when they fail to deliver, companies keep making promises that they break?

One explanation could be that some managers don't mind lying and promise things to get more sales. But we already know that breaking promises has too many negative consequences, so this explanation cannot be the majority explanation. There are many companies that renege on their delivery promises and there must be very few or none that base their sales strategy on lying.

Therefore, since the facts show a massive non-compliance, the explanation must be that deadlines or stock are promised without any certainty of compliance, although the intention is not to fail, which is manifested in all the actions to solve emergencies and the frustration felt by those responsible.

That is, the cause of the breach is simply that knowledge is being applied to make the promise highly likely to be breached.

Is there any solution?

If the majority of companies are non-compliant, it seems that there is no good solution, because if there were, everyone would be using it!

I don't know what you call that argumentative fallacy, but it is clearly a fallacy. If something exists and is very good, everyone should be using it. (I think it is ad populum fallacy).

I remembered a book that Jeff Cox (co-author of The Goal) wrote, Selling the wheel. He starts with the invention of the wheel and goes to offer it to pyramid builders to increase productivity, and they answer something like this: "who is using this, if it were so good, many would already use it, right?

The knowledge to calculate a reasonable delivery date that is highly probable to be met exists, is the Load Control of Theory of Constraints.

The knowledge to calculate and maintain adequate inventories throughout the supply chain exists, it is the Dynamic Buffer Management of Theory of Constraints.

These two methods are effective, I have never seen a case of failure and they are simple to implement. But they have a "catch". To implement them you have to abandon several of the beliefs that we take for granted without question and that are the basis of the methodologies used today to promise dates or to calculate inventories. And today's improvement efforts do not question the basic beliefs, so the prevailing results are still the ones we already know. Translated with www.DeepL.com/Translator (free version)

Conclusion

Service level, especially on-time delivery (OTIF) or availability (FILL RATE), are not just KPIs to measure management. In companies with physical products, it is a necessary condition for a good strategy. Without this level of excellent performance, the life of customers is not so good, and the internal experience in companies is much worse, often the cause of the "burnout syndrome" (see https://blog.goldfish.cl/consultoria/mundo-vuca-empresa-vuca/). And, as a result, profitability is limited.

It is possible, and should be indispensable, to achieve excellent service to build a company that is worth working for, and that you want to buy from.

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VUCA world, VUCA company? 2/2

Ariadne's thread to get out of the VUCA labyrinth

In the previous publication, VUCA world, VUCA company?we characterized certain types of companies that we call VUCA by playing with analogies. Here we resort to the Greek metaphor according to which Ariadne gives Theseus a sword and a spool of thread. The sword is used to kill the Minotaur, while the thread allows Theseus to get out of the labyrinth he must enter to achieve his goal.. The purpose of this note is to provide you with the thread that leads you out of the labyrinth of VUCA companies.

We said that in VUCA companies the work agenda is volatile, that what was a priority yesterday is no longer a priority today, even if the task is still pending completion. That they are uncertain, as their course is constantly changing under the belief that all opportunities must be seized and because they inhabit a reactive culture.
The
complex attribute is because they try to maximize the objectives of each sector or department, generating multiple bottlenecks and conflicts between areas. Finally, they are ambiguous because they compromise in the face of conflict and swing back and forth between the two sides creating confusion and communication disorder.

Origin of the problem

As argued by Dr. Eliyahu Goldratt, behind every problem there is an unresolved conflict. This is no exception. The following is the conflict diagram of the VUCA company.

The diagram begins with the objective, which is to generate harmonious and sustained growth (box A). That is, without waves and without interruptions. For this, there are two necessary conditions: to be effective and efficient, which appear in boxes B and C, respectively.

Effectiveness is achieved with the attainment of goals and for this the action required is to align the management of the system as a whole behind an organizational objective (D). On the other hand, to be efficient you must measure and evaluate people by the objectives of your sector (D').

Thus stated, actions D and D' are mutually exclusive. Aligning the management of the system as a whole behind one organizational objective is incompatible with measuring and evaluating people by the objectives of their sector. Two different objectives cannot be maximized at the same time. This leads to the system oscillating between one objective and the other, creating ambiguity.

We note that the approach taken with the conflict diagram is correct because the required action of aligning the management of the system as a whole behind an organizational goal (D) threatens the need to be efficient (C). The argument is that when the focus and evaluation is on the whole, the system drains resources at the operational levels.

The same happens with measuring and evaluating people by the objectives of their sector (D'), which jeopardizes the need to be efficient (B). The objectives of the areas conflict with each other: administration tries to reduce costs, while marketing tries to increase the value delivered to customers; sales pushes for shorter delivery times, while production complains that these dates are unrealistic, etc. All this leads to a failure to meet targets.

What to change

That decisional knot that traps VUCA companies in the labyrinth can be dissolved. The first step is to recognize those erroneous assumptions that maintain the connection between a necessary condition and the actions that are designed.

Such is the case with the assumption that measuring and evaluating people against the objectives of their sector makes better use of resources and thus the value creation flow of the system as a whole is greater than the costs incurred.

Such a statement seems to be logical. Even more so when there is abundant literature to support it, such as the ABC costing system, which I enthusiastically embraced for years.

Karl Popper warned that we will never know if a hypothesis is true, but when it is not, reality will take care of letting us know that it is not. And that is what happens with this conjecture. Every day more and more evidence and models are added to explain why this logical connection is invalid. In the previous article we detailed the consequences of working in a VUCA company.

What happens in practice is that, by partitioning management into subsystems, multiple bottlenecks are artificially created, transforming simple or complicated systems into complex ones.

Despite sounding similar, complicated and complex are not the same thing. The Cynefin framework developed by Snowden & Boone shows that both simple and complicated organizations are governed by a single constraint, only in the latter the cause-effect relationships are not so clear.

We have seen the erroneous assumption in the branch that satisfies the need for efficiency. However, on the other side there is also another implicit assumption that also deserves to be reviewed. Ample evidence shows the collapse of attempts to manage systems as a whole with centralized decisions. So what is the way out?

Exit from the labyrinth

Since the erroneous assumption is to partition management into subsystems to achieve efficiency, the way out of the labyrinth is achieved by establishing the policy of managing under a systemic view, subordinating the objectives of each subsystem to the restriction of the organization. That weakest link that limits the flow of value creation of the system as a whole.

The five-step approach outlined by TOC provides a powerful framework for systemic constraint management. The first step is to "identify the constraint". The second step is to "decide how to make the most of the constraint". As you may notice, actions have not yet been defined, but the framework that supports them.

The third step states what not to do, as it states "subordinate everything else to the constraint". It is clear here that the objectives of the subsystems are subject to the constraint of the sistema as a whole.

At this point, the objection that we find in the conflict diagram on the effectiveness side may jump out at you, with the assumption that many people implicitly make that in order to align the management of the system as a whole behind an organizational goal, decisions must be centralized.

Dave Snowden sheds light on the mistaken belief. He tells us that what must remain centralized is the coordination of actions, not the decisions. This achieves effectiveness by centralizing the coordination of actions under a shared purpose: to make the most of the constraint. At the same time, efficiency is achieved by giving autonomy and decisional empowerment to people.

We add an argument that remains without refutation and it is the one delivered by Matías Birrell: "the value creation capacity of a system is directly related to the degree of synchronization of its parts".

The Drum-Buffer and Rope (DBR) method, developed by Eliyahu Goldratt, offers a simple solution for managing production. The constraint, like a drum, sets the pace in production. The entry of new production orders is governed by the drum. This avoids overproduction and the detrimental consequences that excess in-process material (WIP) has on the flow. As the constraint completes tasks, a virtual rope alerts upstream that new orders must be started.

We have seen that two objectives cannot be maximized at the same time, therefore, optimizing the organizational objectives necessarily implies that the subsystems operate below the optimum, giving rise to slack. These buffers provide stability to the system by protecting the constraint against variability. Without these buffers, in case of an unforeseen event, any resource becomes a bottleneck, generating chaos. Typical case of the manager who spends his days putting out fires.

That said, we come to the fourth point: "raise the capacity of the constraint". By doing so, the system will generate more value. However, increasing the capacity should avoid balancing the line. It is necessary to check again if this is still the constraint. This leads to the fifth step: "breaking the inertia". The cycle is repeated with point 1.

A matter of perspective

We do not deny the existence of complex systems, our environment is a clear example, we live in a VUCA world. We just give this attribute the character of provisional.

We can find countless facts that show that the complex depends on the observer. Of the observer's capacity to understand, comprehend and interpret the variety of behaviors of the system. So that what seems complex to other observers, without a pattern that explains the cause-effect relationships and feedback loops, when someone reveals it, it becomes simple and even obvious.

Eli Goldratt used his background in physics to apply his knowledge to the organizational field. The five steps approach and the drum, damper and rope system are clear examples that allow to reduce the variety of system behaviours and with it, the complexity. In addition, he has shown that erroneous assumptions lead to the development of policies that translate into management indicators that turn simple or complicated systems into volatile, uncertain, complex and ambiguous ones.

Picking up the thread

It remains to analyze whether the proposed solution eliminates the undesirable effects from which we began to link this analysis.

  • We have eliminated ambiguity by proposing a solution that simultaneously addresses the needs of effectiveness and efficiency.
  • As management is governed by a constraint, the complex character is diluted.
  • The constraint is aligned with the source of competitive advantage and sets the pace of value creation. The resulting KPIs are coherent and consistent, leading to proactive management. Therefore, the attribute of uncertainty is no longer valid.
  • The same applies to volatility. Having identified which is the restriction, time, material, money or human resources buffers can be established to protect the flow. This minimizes interruptions to the value creation process.
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VUCA world, VUCA company?

Just because we live in a VUCA world doesn't mean that your company is too.

In this article I tell you why.

You've probably heard that we are living in a VUCA world.
I confess that the first few times I heard it, I needed to look up the definition to understand what it was all about. Perhaps the same thing is happening to you. Allow me to dedicate a few brief paragraphs to defining VUCA.

In 1987 Warren Bennis and Burt Nanus coined this acronym made up of the first letter of the words Volatility, Uncertainty, Complexity and Ambiguity, and tells us that we live in a Volatile, Uncertain, Complex and Ambiguous world.

It is volatile because changes are constant. Uncertain, because there is no way to anticipate or predict what will happen. Complex, since multiple variables are involved that exceed our capacity for interpretation. And it is ambiguous because it admits different interpretations of the same phenomenon depending on who observes it and where the signals regarding the courses of action to be taken are not clear.

Although we are immersed in a system that conditions and shapes the possibilities of action, the way in which companies adapt to and surf this reality is usually very different, even within the same industry. How they are organized and managed to deliver value is dissimilar, as are the results they generate and the organizational climate they experience.

Using analogies, I use the acronym used in the context to characterize certain companies as VUCA.

Their work agenda is volatile. What was a priority yesterday is no longer a priority today, even though the task is unfinished. It is common for activities to take precedence according to the energy and strength of those who shout the loudest, whether they are clients or heads of sectors that fight to be at the top of the list of urgent tasks.

They are uncertain because they inhabit a reactive culture, lacking the ability to anticipate changes and stay the course despite the adversities of the environment. They often embark on multiple projects without anchoring them to a core competency (core business) under the belief that "every opportunity must be seized"..

As for the Complex attribute, they are so because in the eagerness to reduce costs, they have generated multiple indicators that prioritize the objectives of each subsystem, losing sight of those of the company as a whole. As the objectives of each department are not subordinated to those of the company, multiple bottlenecks arise where the efficient management of each one of them threatens the achievement of the objectives of the other departments. Eli Godratt narrated it in a fantastic way in his novel, best seller worldwide, The Goal.

Source: kjpargeter – https://www.freepik.es/fotos/fondo

The other acronym is A for ambiguous. They are companies that are trapped in dilemmas and try to make a balance by looking for solutions that leave them relatively well off, which they do not achieve. Therefore, they swing between both sides of the solution generating confusion and communicational chaos. As an example, they maintain lines of action to innovate and raise the perceived value of the brand while implementing drastic cost reductions that threaten quality.

A hot iron

To explain the consequences of working in a VUCA company, I use the metaphor of glowing iron.

If responding to the multiple demands people have in their jobs is akin to holding a hot iron without protection, it is not surprising that they distance themselves from what burns them, and even encourage others to lessen their commitment. Of course, if the others maintain their performance, they leave those who withdraw exposed.

Source: own elaboration based on data from Gallup (2013).

This is consistent with the report State of the Global Workplace 2013 Report The Gallup consulting firm reports that 52% of workers are not committed to their jobs. Moreover, 18% have an overtly negative attitude towards their work.

For those at the top of the pyramid, reality is usually different. For them, taking off the company's shirt is not an easy task, and even though it burns, day after day they cling to the hot iron of managing a VUCA company. I imagine there is no need to detail the consequences of holding a red-hot iron without adequate protection.

They suffer from what is known as burned-out worker syndrome, .. or surmenage in french.

This syndrome in its first phase begins with physical and emotional exhaustion. If the strategy to respond to stress is not adequate, the second phase is triggered, leading to cynicism and depersonalization. In this stage, the other person is no longer recognized as a legitimate subject with a valid point of view, but is perceived as if he/she were an object. Those who suffer from it "take off the shirt of their job". The 18% with a negative attitude mentioned above clearly manifests cynicism.

If exposure to stress continues without an adequate coping strategy, the third phase is reached in which productivity drops, the person feels a collapse in his or her sense of accomplishment and suffers an identity crisis.

Now, what are the physical consequences for this manager who continues to cling to the incandescent iron? The clinical repercussions usually include hypertension, high blood sugar, gastritis, irritable bowel syndrome, contractures, insomnia, irritable temper, etc. It is not exclusive to CEOs, it is also suffered by workers who, in spite of everything, continue to wear the shirt and put their chests to the bullets.

Both are victims of the VUCA company. But remaining in the role of victim does not lead to a solution. What is striking is that CEOs assume that these are the inevitable consequences of being in a managerial position and their concern is focused on the lack of staff commitment, not on the causes that generate this behavior.

The difficulty lies in the fact that the behavior is visible while the causes are not easy to distinguish. They are rooted in policies that translate into the way the company is organized and managed. Consequently, in the way personnel are measured and evaluated.

Trapped in the labyrinth

If the above description makes sense to you, I invite you to read the following post in which I will tell you how to get out of the labyrinth in a simple way.

I invite you to leave a comment and follow us on social networks.

Thank you very much for your attention!

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