A Kaizen Illustration
While it is said that ‘failure to plan is planning to fail’, we can see the key role that the planning process plays in ensuring successful execution. Contrary to many approaches in practice, one of the most emphasized phases of the PDCA approach is the planning phase. The implementation cycle of Kaizen is often illustrated by the acronym PDCA (or the Shewhart cycle) which stands for: Plan –> Do –> Check –> Act.
A typical top-down or externally developed plan often fails in execution because it is developed in an ivory tower, disconnected from the hands meant to implement them. The risk is that not enough time is invested in learning the unique circumstances and perspectives of the problem at hand. More time is spent implementing a poor plan, than invested in developing a plan which can executed efficiently.
In reviewing an example, we can observe the power of the Kaizen planning process as it illustrates the bespoke relationship-based tailored solution that is grounded in collaboration. First though, we will see the 5 steps of the planning phase.
- Clarifying the problem
The first step of the planning phase is clarifying the problem. Many people have quick first impressions of the obvious problem to them but ask 5 different people what the problem is and you’ll often get 5 different answers. Kaizen methodology challenges the users to have a clearly articulated agreed upon look at the ideal state, current state and what the gap is.
- Break down the problem
Breaking down the problem is often considered the discovery phase through discussion and fact finding. Processes are mapped, data is collected, and key stakeholders are identified. The Kaizen process asks the group to identify the Who, What, Where and When of the problem.
- Target setting
Setting goals which are too ambitious risks alienating those who are meant to execute the plan. Kaizen seeks to systematize the practice of SMART goals.
- Root cause analysis
Arguably where the vast majority of time is spent is in analyzing and breaking down the problem. The Kaizen approach of applying the 5 Why’s further relies on the ground level expertise of subject matter experts. To fully understand a problem, Gemba suggests that leadership should never assume they know the reasons for a problem without speaking to people and observing the root cause themselves.
- Develop countermeasures
If 5 different people will identify the problem is 5 different ways, each person will also have 10 solutions that will solve the world. Every stakeholder wants things to be better, but everyone has a different idea on what ‘better’ means and how to get there. At the same time, each countermeasure needs to consider the pros and cons before from all perspectives before being agreed upon.
Implementation, Facts and Results
Of course, each countermeasure has different stakeholders and careful consideration should be taken for which ones will be impactful and efficient. Having agreed upon a plan for short term and long term countermeasures, the implementation becomes more efficient.
Rather than assuming a wide gap in knowledge between leadership and staff, due respect is given to all parties. After all, in solving organizational issues, organizational involvement at all levels should go deeper than lazily segregating ‘idea people’ from ‘doing people’. While the it requires greater patience and humility, a willingness to admit that leadership can actually learn something from their subject matter experts lays the foundation for a healthier corporate culture. As Steve Jobs said: “We don’t hire smart people so we can tell them what to do, we hire them so they can tell us what to do.”
The Kaizen approach advocates collaboration right from the beginning but then again, since the goal of Kaizen is by nature never-ending, the goal and the approach become one in the same.
Case Study Illustration
A professional services firm has experienced cash flow issues for the last few years. Having at one point benefited from strong reserves and consistent profits, total revenues have increased consistently but with higher expenses, the bottom line is suffering, trending towards losses.
Clarifying the problem
- Current state: The firm has been able to grow revenue, but higher expenses and continuous promises of future payoffs have yet to materialize.
- Ideal state: The firm will benefit from sustainable growth and profitability.
- Gap: The existing business practices and revenue model is not sustainable for the ongoing scalable success and growth.
Break down the problem
Financial reports showed that while gross revenues have increased over the last few years, gross margins have declined, cost of acquisition and commission incentives are increasing.
Return profit margin levels to last year.
Root cause analysis
Starting with the problem of the declining profitability, the question of ‘Why?’ is consistently asked, without taking any answer for granted. While each root cause can have multiple branches, it is not uncommon that multiple root causes may share similar reasons. In a service based firm where the majority of expenses are related to salaries and compensation or marketing and sales, declining profit margins are largely due to compensation structures or cost of acquisition.
In this case, most of the root causes can be directly or indirectly attributed to lack of financial planning and analysis in decision making. The short sighted perspective on ROI and unwillingness to change can be addressed by careful financial scenario modeling, while considering human incentives and organizational behavior.
Some examples of countermeasures which were considered once the primary countermeasure of an investment in improved financial planning and analysis included. The countermeasures required significant discussion, not just internally from management, but with those directly impacted and compensated in designing a structure that achieved the same goal of a long term firm profitability and sustainability.
- Restructured compensation structures to align with organizational success and cash flows
- Re-balanced rewards and incentives to reward diversified revenue streams with highest long term ROI
Implementation, Facts and Results
The immediate benefits were significant (improved profitability, improved cash flexibility, improved creditor relations) and showed early signs of a turnaround in profitability. The model and initial forecasts also showed that the renewed focus on sustainability and gross margins would result in consistent long term net profits significantly better than recent years. Further analysis would be needed to fact check this and would be directly observable through the financial statements and cash flows.