Pursuing operational excellence is an unending and task. But how hard and fast should improvement be pushed and what is the role of management in setting the pace? On October 3 manufacturing and operational excellence leaders met to discuss these questions at a Manufacturing Directors Forum event.
Using the recent Olympic Games as an example for how to excel has become a favourite metaphor among politicians and bankers. Sir Mervin King told us in August that “we have been reminded that an objective that is worth attaining, like a gold medal, requires years of hard work. Success does not come overnight. That is as true of our economy as it is of sport.”
And the opening to this Manufacturing Directors Forum dinner proved that manufacturing leaders and improvement professionals know that it is also true in business. “The Olympics provide valid lessons to governments, manufacturers, everyone, that we must not let slip by,” said Colin Larkin, plant manager for Fiat Industrial-owned tractor manufacturer Case New Holland UK (CNH p32).
But subsequent conversation over dinner also showed that the hard work must continue long after the initial objective, or objectives, have been attained. As dinner guests introduced their experiences, challenges and ambitions for operational excellence in their businesses a common impression of companies or individuals grappling with how to sustain continuous improvement was obvious.
For senior manufacturers this raises the question of the role of management in providing a mandate and a cultural framework for change – two requirements which divided opinion around the table.
Values v KPIs
Some – like Vincent Middleton, managing director of family-owned Newburgh engineering – were strong proponents of a value-led approach. “We spent about five years on cultural change in the nineties,” he said, describing how knowledge sharing with Asda proved a transformative experience on this journey. “Suddenly [the workforce] got it and we had no more management issues. It was amazing to see how the whole organisation pulled behind our agreed set of goals – each managing themselves to ensure they worked towards them every day.”
PE investment gives focus to value creation
Newton works with management teams to help create step change in business. In the eleven years since its foundation Newton has worked with around 500 management teams and 40% of those have been private equity owned.
As discussion of the role and focus of management in driving operational excellence kicked off at this MDF dinner Tom Wedgwood, co-founder and director of Newton shared some striking observations on the relative performance of these PE-driven firms with those under other ownership models.
Mr Wedgwood shared with guests that, in the past 10 years PE-owned companies have achieved three times the level of shareholder return on the stock market. He also asserted that, post 2008, the majority of this return had come, not through leverage – as is often assumed – but through spurring value-add activities.
In search of the particular attitudes and actions which have caused PE-owned firms to outperform others so consistently since 2008 in terms of value creation and EBIT growth, Newton undertook its own research. “What we saw in relation to employment was interesting,” said Wedgwood. “Between 2008 and 2010, manufacturing as a mass lost around 10% of headcount. In PE-owned firms, despite a lot of outsourcing, the average employment went up by 2%.”
Two things allow this growth said Wedgewood. The first is investment in good, professional management teams in which the investors take a strong slice of the action. These management teams form robust strategy and commercial initiatives which help to rationalise and focus operations.
But crucially, Wedgwood identifies “an enormous mandate for change” as being the key to success in PE-owned firms. “When a private equity firm first takes control, no one knows what is going to happen. In that environment you can drive through a huge amount of change.” Furthermore, Wedgwood concluded, research shows that PE-owned firms in the midmarket respond best to this kind of mandate and expectation. “This is because it is easier to feel management in a midmarket firm – right the way from the board to the shop floor – whereas ownership is often almost invisible in large firms.”
Can manufacturers without PE replicate the hunger for achievement that this ownership model drives?
But for others this ‘soft’ approach did not wash. More measurement and a faster pace of change were noticeably seen as imperative among larger organisations – or their heavily audited subsidiaries. Ed Koch, head of manufacturing development at SABMiller said that there was a need for management to create a ‘burning platform’ for change. Others, including CNH’s material handling manager, Dean Stephenson felt that, in a competitive business environment ‘harder’, data driven approaches to improvement, manifest in regular audits from Fiat in the case of CNH, were necessary to maintain what he called “a sense of urgency” to improvement. David Coatsworth, manufacturing director at Parker Hannifin agreed, but tempered his stance with the statement that “if you continually drive improvement then you will never get ‘pull’ in value creation for the business.”
Mr Coatsworth also questioned the practice of offering monetary reward for improvement suggestions – as is the case at CNH. “Personally I believe that if you pay individuals hard cash for their suggestions you will never get the right team approach to continually fulfilling the company strategy,” he commented.
Measurement with meaning
This observation linked to conversation about the importance of understanding why certain measurements of improvement are chosen, and questioning whether they are right for the business, its values and the requirements of its customers and shareholders. One important observation, agreed upon by all was that lean and operational excellence must not be seen as purely cost cutting initiatives, nor purely the responsibility of operations.
“The biggest [competitive] lever in a business is often not cost,” observed Colin Drummond, operations director at GlaxoSmithKline. “Quality, on time in full delivery, lead time, your ability to deal with seasonality of demand, these might all be bigger factors, depending on your business, product, customers.”
Mr Drummond suggested that one way to ensure the most meaningful drivers for improvement are recognised is to involve commercial teams and other non-manufacturing departments. All agreed, but on further questioning most admitted that this was not the reality of their operational excellence initiatives which were still generally viewed as being an operations remit.
This is just a brief summary of a few key observations made at the MDF dinner on the role of management in effecting positive and continuous change in manufacturing organisations. Other interesting discussions also emerged around evolving attitudes to product complexity and how to offer variety without imposing unnecessary variation in manufacturing. The interaction between continuous improvement, measurement and increasing levels of technology also prompted debate, most agreed that, while technology is facilitating more data capture opportunities, too much reliance on it will distract from strategic improvement.
Guests at this Manufacturing Directors Forum dinner represented the following organisations:
CNH Tractors | Hozelock | Milliken | Newburgh Engineering |
Parker Hannifin | Newton Europe | SAB Miller
The Manufacturer extends its thanks to Newton Europe for sponsoring this event. For more information about The Manufacturer Directors’ Forum events please contact Henry Anson: ([email protected]) / 0207 401 6033.