

Executive Briefing

Breakthrough Objectives and Continuous Improvement: Closing The Gap A report for manufacturing leaders on achieving intelligent growth. Sponsored by:

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Table of Contents  About

This Report*

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 Introduction:

Conceptions, Misconceptions and Realities

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 Key

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Metrics: CI Companies Are Growth Leaders

 Closing

the Gaps: Increasing the Benefits of CI

 Revenue Growth: Alignment, Execution and Breakthrough  Customer

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Intimacy: CI Driving Forward Focused Planning

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 Assessing

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CI Effectiveness

*Percentages don’t always add to 100 due to rounding.

About This Report  This report presents the results of an exclusive survey of select IndustryWeek readers conducted by Penton Research for IW Custom Research and TBM Consulting Group. The research objectives were to determine the benefits received from using operational excellence/continuous-improvement programs and to identify gaps between program outcomes and strategic goals. Penton Research emailed invitations to participate in the online survey to a net 38,324 subscribers. By Nov. 8, 2011, Penton Research received 300 completed surveys, for an effective response rate of 0.8 percent.

About IW Custom Research  IW Custom Research is an operating unit of IndustryWeek magazine that provides insight into executives’ opinions and manufacturing trends. IndustryWeek connects decisionmakers within manufacturing enterprises to share ideas and tools that inspire action. In print, online and in person, the IndustryWeek community is the leading resource for manufacturing operations knowledge. IndustryWeek is a property of Penton Media Inc. For more information, go to www.industryweek.com.

About TBM Consulting Group  TBM Consulting Group is a global operations management consultancy helping manufacturing and service organizations leverage business excellence for significant competitive advantage and value creation. The company was pivotal in introducing LeanSigma management principles to the North American market 20 years ago. TBM consultants are frequently retained for their ability to help organizations execute and achieve breakthrough results and for leaving behind a framework and structure for sustainment. TBM cofounder and CEO Anand Sharma has co-written two books, “The Perfect Engine: How to Win in the New Demand Economy by Building to Order with Fewer Resources” and “The Antidote, How to Transform Your Business for the Extreme Challenges of the 21st Century.” TBM developed Dploy Solutions (www.dploysolutions.com), a suite of web-based SaaS products that facilitate management processes for effectively executing strategic objectives, tracking key performance indicators, managing a knowledge base and for aligning continuous improvement initiatives with critical business performance metrics. For more information call 800.438.5535 or visit www.tbmcg.com.

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Introduction

Conceptions, Misconceptions and Realities In fall of 2011, IndustryWeek and TBM Consulting Group collaborated to identify conceptions, misconceptions and realities about the connection between continuous improvement (CI) programs and high-level strategic goals that achieve “breakthrough” (i.e., transformative) change and intelligent growth at global manufacturing enterprises. This collaboration resulted in the following conclusions:

 Companies with CI programs are much more

successful at increasing revenues, operating income and cash flow.

Companies need to grow, but executives have learned that growth without transformative change is fleeting. As companies grow, they also become more complex, and if this complexity is not managed through ongoing continuous improvement/operational excellence efforts, the benefits of growth erode. Intelligent Growth:  Occurs with “attention” to cost but not a focus solely on cost.  Is driven by processes that achieve



 The ability to grow increases as a company’s

CI program matures.

 To get more from their CI programs, leaders

should improve communications, speed up problem solving, and have a better understanding of customer demand.

intimacy with customers.  Requires an enterprise-wide



culture change.  Challenges leaders to be open to



looking at business structure in new ways.

Source: TBM Consulting Group

 CI companies are more likely to use forward-

looking planning tools than non-CI companies.

While manufacturers have been using CI programs (i.e., Toyota Production System, lean management, operational excellence, LeanSigma) for decades to improve productivity and remove costs, many — we suspected — were not fully optimizing their CI efforts for growth. We also theorized that organizations with a focus on business excellence create more value than those without such a focus. These two theories became the basis for an IndustryWeek reader survey of C-level executives, vice presidents/directors, and managers (Figure 1) at public and private companies (Figure 2) across a variety of manufacturing sectors, the largest of which were industrial machinery, aerospace/defense, medical devices, food and beverage, automotive, and consumer durables. Companies ranged in size from less than $100 million to more than $5 billion.

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TBM Outlook

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We gathered baseline information on executive priorities and the number of companies that use CI programs. Although responses regarding executive priorities were as expected, we were surprised and pleased to see that 84 percent of responding companies have CI programs of varying maturity (Figure 3). We also asked all respondents what they believe are the most important priorities for their executives, regardless of CI program maturity level (Figure 4). Revenue growth and cash flow were key priorities for all respondents. In the sections that follow, we describe what we learned by presenting research results, interpreting and elaborating on the results based on our shared knowledge and experience, and incorporating real-world examples of companies that have successfully used CI not only for internal improvement, but for intelligent growth.

Figure 2: Company Ownership Owned by private equity 10% Publicly traded 40% Privately held 50%

Figure 1: Respondent Job Level

17%

12% 16%

31% 24%

■ C-Level ■ VP/Director

■ Manager with Direct Reports ■ Manager without Direct Reports ■ Other

Figure 3: CI Maturity Level

How would you describe your company’s operational excellence/continuous improvement programs? ature: Continuous improvement is the basis M of our company-wide culture and strategy.

26%

Moderate: We are in the process of or have implemented strategy deployment and/or are working extensively with suppliers.

26%

Midcourse: We are starting to apply operational excellence principles/programs to non-production functions such as sales, marketing, IT, finance, etc.

22%

Early: We have started using tools such as kaizen, one-piece flow, standard work, etc.

23%

Other/No reply.

2%

Figure 4: Executive Priorities

Which of these will be priorities for executives at your company during the next 12 months? ■ First choice

■ Second choice 25%

Revenue growth

Improving cash flow

■ Third choice

17%

10% 13%

9%

Containing direct costs

8% 9%

12%

New-product innovation

8% 8%

7% 4% 10%



7%

Improving productivity

13%

15%

11%

9%

■ Fourth choice

■ Fifth choice

6% 8%

6% 5% 10%

15%

8%

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Key Metrics

CI Companies Are Growth Leaders The first area we studied was metrics — specifically growth of revenue, operating income and cash flow because these are the building materials of transformative change and intelligent growth. Not surprisingly, companies with CI programs fared better than companies with no CI programs (Figure 5). What we learned, though, is that this difference is dramatic. Additionally, as CI programs mature, growth margins increase (Figures 6, 7 and 8).

align CI program activities to financial objectives to ensure that the activities yield results that will create the most value for the enterprise.

Figure 5 clearly demonstrates that companies with no CI program expect little or no revenue growth, flat or declining operating income, and flat or negative

capital and generate improved free cash flow, they are leveraging the liberated resources, their management system and their improved ability to execute strategically; acquire new businesses for growth; integrate acquisitions quickly; better serve customers; and capture market share from competitors.

Figure 5 : CI Companies Perform Better

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Midcourse or Mature

➤ 50%+ expect revenue growth 5.1% or higher ➤ 61% expect operating income

growth 5.1% or higher ➤ 54% expect cash flow to increase

➤ 50%+ expect revenue growth 3% or less

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➤ 49% expect operating income growth to be flat or down ➤ 79% expect cash flow to be about the same or down

No Program

changes in cash flow. On the flip side, over 50 percent of Midcourse/Mature CI organizations expect revenue growth of 5 percent or higher, operating income of 5 percent or higher, and increased cash flow. This supports the TBM concept of intelligent growth: We believe there is a significant opportunity to better

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Mature CI companies have placed a heavier emphasis on business process to drive growth, applying continuous improvement to sales force effectiveness, speed to market, rapid product commercialization and other non-manufacturing areas of the value stream. Furthermore, as these organizations reduce working

As with revenue growth, operating income growth will be greater for companies with CI programs in 2012, and those with Mature programs expect the largest gains (Figure 7). Fifty-four percent of Mature organizations expect an increase in cash flow (Figure 8). Early/Midcourse varies based on where they are in the process. Still, 45 percent of respondents at the Midcourse level expect cash flow to increase, while most of the companies with no program expect cash flow to stay the same (45 percent) or decrease (34 percent). Reductions in working capital enable organizations to reduce reliance on short- and long-term debt, invest for growth, and avoid having large amounts of cash tied up in obsolete or excess inventory. Why is all of this so important to breakthrough transformation? Consider the following examples.

Figure 6: Expected Revenue Growth

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

15.1% +

15.1% +

Milbank Frees Up Cash To Grow: Milbank Manufacturing Company liberated cash and space using lean process improvement, and subsequently was able to pursue a differentiated growth strategy. Milbank plays in a very mature category of electric meter sockets and needed to enter new markets for continued growth and profitability.

15.1% + 5.1% – 15%

5.1% – 15%

3.1% – 5%

5.1% – 15%

3.1% – 5%

3.1% – 5%

3% or less

The leadership team defined a vision and drove that vision throughout the organization by embracing operational excellence to rapidly drive sustainable improvements in quality, cost and delivery. They are now using the freed-up cash and space to invest in a new alternative-energy solutions business.

3% or less 3% or less

Mature

Early/Midcourse

No Program

Companies with no CI program growing slower.

Figure 7: Expected Operating Income Growth

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

15.1% +

15.1% +

15.1% +

Milbank reduced lead times by 53 percent and generated over $3.5 million from reductions in work-in-process and finished goods inventory. They were able to support their growth initiative with existing facilities by liberating 100,000 square feet of floor space.

5.1% – 15% 5.1% – 15% 5.1% – 15%

3.1% – 5% 3.1% – 5%

3.1% – 5% 3% or less

3% or less

3% or less

Mature

Early/Midcourse

No Program

Companies with no CI program have slower bottomline growth.

Figure 8: Reported Change in Cash Flow over the Past Year

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Increased Increased

Increased

About the Same

About the Same

About the Same

Decreased Decreased

Mature

Decreased

Early/Midcourse

No Program

CI programs put more cash in pockets.

Improved Agility Beats Low-Cost Competition: One of the outcomes of lean continuous improvement is faster responsiveness and increased agility. These attributes enabled WIKA, a leading international manufacturer of pressure gauges and other critical measurement instruments, to respond quickly to market declines and grow significantly — even during a global economic recession. WIKA transformed from a high-volume, low-mix producer to a low-volume, high-mix producer in order to compete with low-cost competitors abroad. By doing so, the company doubled revenue in eight years. Profitability grew by more than 10 times during the same period. Market-based growth, operational dexterity, superb execution, and committed associates were behind the success.

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Closing the Gaps

Increasing the Benefits of CI When CI initiatives are properly aligned to strategic objectives and key performance indicators (KPIs), it becomes easier to ensure that associates clearly understand the organization’s challenges. This is why CI should be a foundational element of a comprehensive business system. Following are three examples of how leaders can do this while addressing the improvement opportunities listed in Figure 9. Communication: Policy deployment helps leaders to create a detailed action plan for achieving strategic objectives; agree on KPIs; and assign individual responsibility. It also establishes a process and disciplined set of checks for monitoring projects and progress.

the details of how to execute. The policy deployment process brings leaders to agreement on three to five key breakthrough processes that they will collectively work on and support during the next year. Problem Solving: Monthly reviews for both policy deployment and KPIs help leaders to quickly address initiatives that are falling behind on objectives. As a result, managers can drill down to better understand root cause for the miss and ensure that the countermeasures put into place will correct the problem. Customer Demand: Companies that have consistently outperformed the S&P 500 put the customer at the center of all their decisions. They embrace capabilities such as voice of the customer, value selling, cooperative business planning, customer segmentation and product commercialization to ensure a better understanding of customer demand.

The mistake that leadership teams often make without policy deployment is to take a lot of time discussing a five-year strategic plan and vision without defining Figure 9: Upping Benefits From CI

Which of these would most increase the benefits your company receives from its operational excellence/ continuous improvement effort? ■ First choice

■ Second choice

Better communication and planning among functions.

■ Third choice 27%

12%

14%

19%

Faster problem solving.



A more concrete understanding of customer demand.

12%

11%

10%

Better enterprise-wide understanding and analysis of process and performance data.

11%

16%

10%



Faster new-product development.

9%



Faster adjustment to changing customer demand.

8%

A long-term performance focus vs. quarterly.

7%

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8%

13% 8% 8%

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6%

10%

11% 5% 11%

7% 8% 8%

■ Fifth choice 11% 11%

10%

12%

8%

8%

11% 14%



More/better operator training. 3% 5%

■ Fourth choice

11%

8%

12% 5%

Revenue Growth

Alignment, Execution and Breakthrough When we asked respondents what they should do to increase their company’s ability to grow revenue, their top choices were (Figure 10):

Here again, organizational alignment via a business plan rooted in CI is key to achieving these improvements. One example of a company that has successfully done this is Trail King Industries, a manufacturer of customized trailers used for transporting heavy equipment and other oversized items.

 Improve ability and speed to introduce

differentiated products.

 Improve ability to more quickly and efficiently

close sales.

Trail King needed to augment sales and improve cash flow. Company leaders agreed a key breakthrough objective was elimination of bottlenecks in the new-product-development process in order to get new designs and customized products to customers quicker. They embraced a LeanSigma design process that introduced early collaborative planning to prevent downstream disruptions in the design process. As a result, Trail King reduced the design phase of the customization process by 12 weeks, cut production costs, and increased quality and customization options. Before this breakthrough, product development from concept to rollout took oneand-a-half to two years. Afterwards — nine months.

 Streamline product or service portfolio to

optimize sales and profit potential.

TBM Outlook We are seeing that companies that are applying process control and CI practices to address challenges in functional areas, such as sales, product management, and change management, are emerging as leading competitors in their industries despite escalating competition.

Figure 10: Getting Better At Revenue Growth Which of these would most increase your company’s ability to grow revenue? ■ First choice

■ Second choice

■ Third choice



Improving the new-product-development process to more quickly and efficiently fulfull unmet customer needs.



Improving sales and processes to more quickly and efficiently close sales.

25%

22%

Rationalizing products/product families to concentrate on those with the greatest sales/profit potential. Becoming a more flexible supplier to meet variable customer demand.

Improving both horizontal and vertical alignment around strategic goals.

Better supplier performance.

■ Fourth choice

17%

13%

8% 5%

19%

10%

15%

17%

10% 12%

■ Fifth choice

13% 10%

13%

11%

9%

13%

17%

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9%

14%

13%

10%

8%

11%

11%

9%

6% 14%

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Customer Intimacy

CI Driving Forward-Focused Planning Because planning is so crucial to performance, we wanted to find out what tools companies used for planning.

TBM Outlook While “looking-back” sales and profitability data has its place in planning, it is not as effective at providing guidance on what to do today to be successful tomorrow. The challenge for leaders is to apply CI tools to get closer to customers and better understand markets.

We found evidence that Mature CI companies are making progress toward using more “real-time” market indicators such as market-focused business Figure 11: Too Much Looking Back, Not Enough Looking Ahead

Mature CI Program LOOKING AHEAD ➤ 70% using competitive analysis ➤ 68% using market-focused business analytics ➤ 54% using information about forward-looking customer strategies No CI Program LOOKING BACK ➤ 36% using competitive analysis ➤ 21% using market focused business analytics ➤ 28% using information about forward-looking customer strategies

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analytics and information on forward-looking customer strategies (Figure 11). One such company is Vermeer, which picked up on subtle differences in customer preferences for its products though voiceof-the-customer research. Customer Insight Prompts Targeted Design: Vermeer, a global producer of heavy equipment for construction and agriculture, used the CI principle of voice of customer to identify a potential misstep that could have occurred when it began selling a new trenching machine in China. The machine had been designed to deliver labor savings, which is highly valued by Vermeer’s U.S. customers. In China, however, labor savings is less important while other attributes are more valued. Vermeer learned this by taking a custom-focused, forward-looking planning strategy and subsequently created a modified design for the Chinese market. Vermeer’s story illustrates the urgent need for manufacturers to apply process excellence in all elements of the value stream. The company decided not to sell current products overseas but instead opted to delve deeply into the minds of their customers. Growth in a global economy is becoming more difficult to achieve. Manufacturers will need to transform in order to stay competitive. If Vermeer had introduced a product developed for the American market, for example, it would not be as successful in China.

Looking Forward

Closing the Gaps

Assessing CI Effectiveness Success such as that achieved by Vermeer requires a leadership-supported connection between CI priorities and strategic priorities. Vermeer is a Mature CI company (practicing for more than 10 years) and uses strategy-deployment and an ongoing cycle of CI projects to intelligently grow. One of the hallmarks of a company operating at this mature level is that CI practices and tools are both customer-centric and process-centric: Customer Centric

 Accessing the customer mind-set  Organizing around value streams

Process Centric  Converting ideas to innovation  Product commercialization  Strategy execution  Talent development



 Cooperative business

planning

If your company has been practicing CI for a number of years and has not achieved the corresponding growth depicted, this could be because of a gap between your CI priorities and your strategic priorities. As this report demonstrates, closing this gap is a worthy effort for global manufacturing leaders because as alignment improves, CI learning and application mature, which opens the door for transformative change and lasting growth. The case studies we presented illustrate some of the promising opportunities that are waiting to be discovered. In order for leaders to realize these opportunities, though, they will need to change their thinking on CI programs as our case-study companies did. This will mean being open to entirely new business structures, but the resulting benefits will enable leaders to differentiate their companies in the increasingly crowded global marketplace.

Figure 12: CI Progression

 Operational excellence



 Business performance

metrics

 Acquisition integration

Outcomes of such a strategy are speed to market, product vitality, free cash flow, consistent earnings growth, and a sustainable competitive advantage. Where is your company on TBM’s lean-progression matrix (Figure 12)?

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