IMPROVING ROCE THROUGH A SMART MANAGEMENT OF THE INTERDEPENDENCIES OF THE ORGANIZATION. Claudio Vettor

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1 IMPROVING ROCE THROUGH A SMART MANAGEMENT OF THE INTERDEPENDENCIES OF THE ORGANIZATION Asset Work Srl, Via Creta 26, Brescia, Italy SUMMARY Claudio Vettor The only way to achieve effectively the ROCE improvement is manage the interdependencies among internal department (Operatons, maintenance, procurement,..), suppliers, customer and stakeholder. In every system (SME, no profit organization, large corporation,..) we worked on we found a 30% minimum extra costs due to the poor interdependencies management.the understanding of the interdependencies among these components provides a lens through which we can know better and improve our organisations. In order to improve the poor interdependencies management we must control process stability and we must eliminate the cognitive constraints. Theory of Constraints lead the management to build a cost-effective organization. Many cases in a widespread kind of companies are showing how to install an ongoing improvement process based on this method. INTRODUCTION The organization becomes larger and more complex, the projects through which the management try to improve overall performances becomes larger and more complex. More the complexity more the difficulty to effectively manage the organizations. Despite the enormous quantity of resources, money, knowledge spent in the last 50 years to improve the performance of the organization there is a lack of understanding about the way to manage complex system. The most used model to manage organizations and to solve is the Hierarchical Model. Figure 1 Hierarchical Model. The idea behind the pyramid is that quality and productivity are increased as a result of increased individual effort; the company performance is the sum of the individual performances; the complexity can decomposed in simpler problem and the Solution is the sum of the solutions. This model is effective only when the parts of the system interacts loosely. When the interdependencies between the parts of the system are strong the hierarchical model fall down quickly. Why? Because any individual component of the system, trying to achieve its best performance, perceive the other department as a obstacle. In other words in a complex system without a strong management of the interdependencies, more the pressure on competion less the overall performance. Signals are often weak: lack of motivation, lack of focalization, conflicts, delayed decision. We need a new model. A model in which the most important is the way individual performance interact to produce a result. What becomes crucial here is not the output of a single performance but how integrate these performances in order to achieve the goal of the organization. 1

2 This model exists, is called Systemic Model and TOC Theory of Constraints is the most complete set of systemic management methods and tecniques. BASIC PRINCIPLES OF SYSTEMIC MANAGEMENT AND THEORY OF CONSTRAINTS Every organization is a system, that is a network of interdependent components which work together to achieve the goal of the system. As every organization performances are not unlimited, it means that every system has a constraint that limits its expansion. A Constraint is anything that prevent a system from realizing its best performance in comparison with the goal. The definition on the constraint demands two prerequisites: i) the goal of the system is explicitly defined and agreed upon ii) there is a measurement system in place to record performance. In companies that were built for profit the goal is simply "to make more money now as well as in the future". But there are other systems like schools, hospitals, municipalities, civil service, defence etc., which their goals are not always defined and agreed goals. A measurement system is needed for two purposes: the first is to tell us how well have we performed versus the goal - a sort of yard stick and the second is to guide us with decisions and actions we take - do they bring are closer to the goal or take us further away. The constraint is the main problem of an organization: what are the factors that contribute to produce it? Lack of knowledge - managers don t know how to face it. Presence of organizational constraints that prevent from facing it or interfere with every attempt to act on it. (These constraints can reveal themselves in the shape of business policies, measures or procedures that reduce managers and employees margin of enterprise.) Presence of behavioral constraints that induce people not to be worried about the system constraint. How may we face and remove constraints? SORTING OUT CONSTRAINTS Step One - CRT Analysing the Existing situation and finding the core problem Step three - TrT Devising a full plan of actions to make it happen (while overcoming resistance to change) Sorting out constraints is a three step journey. Step one - Understanding the current situation - what causes the existence of the constraint. This is done through a cause and effect analysis of the current reality and can be visually presented as a logical diagram called - Current Reality Tree (CRT). The CRT has to logically explain what is the core problem that causes all the negatives and difficulties that are experienced in the constrained environment. Step two - Developing a solution while presenting the logical connections that can explain why the suggested changes will generate the desired outcome. This is presented in a cause and effect diagram called Future Reality Tree (FRT). Even though the solution is still in a visionary stage - the supporting logic does exist in reality, it is just a matter of making it happen. Step three - Devising a detailed plan of action that will guide the manager in the journey into the unknown - the journey to implement a solution which is a change. Overcoming obstacles and difficulties - real or perceived - demands thorough work with strong logic in order to prepare (as realistically as possible) to handle the unknown. This is done through a short-term cause and effect diagram which is called Transition Tree (TrT). Figure 2. Three Step Path. There are two more intermediate steps that bridge between the steps. The bridge is there to use the emotional power associated with the fear of going outside one's safety zone. The tool used is a short cut of cause and effect relationship. It distils just parts of the logical connections and creates the right emotion that helps to find breakthrough solutions that bridge into the next step. The bridge is an innovative process that helps to overcome the fear of - not knowing what to do. 2

3 Between step one and two - the bridge is called a core problem cloud. A cloud is a short and concise way to record a problem. It is a five box diagram that contains all the necessary elements to present the reasons for the existence of the problem and it provides the platform for the way out - the breakthrough idea. Bridge: Core Problem Cloud - Finding a breakthrough idea Step One - CRT Analysing the Existing situation and finding the core problem Once we have a direction for the solution we can start to build a full and detailed solution that will generate all the benefits and with no or very few new. The second bridge is between step two and step three: Once the solution unfolds and the logic backs it up it starts to frighten us - as the "security blanket" of "it is impossible" has just disappeared. What we need is a strong mechanism that will capture the emotion of the fear of obstacles and translate it into an overall map of intermediate objectives and milestones. This is called - the Prerequisite Tree - PRT. Figure 3. The first bridge Summary: The full construction of a common sense solution contains five elements: CRT - Current Reality Tree CPC - Core Problem Cloud Bridge: PRT Prerequisite Tree All the intermediate Objectives that will help overcoming the obstacles in the way to implementation Step three - TrT Devising a full plan of actions to make it happen (while overcoming resistance to change) FRT - Future Reality Tree PRT - Prerequisite Tree TrT - Transition Tree This is known as the full TOC/TP map. It serves as a basic methodology for the development of any application. Every TOC solution has been developed while using this approach. Figure 4. The second bridge BUSINESS CASE 1 PLANNING & SCHEDULING OF MAINTENANCE ACTIVITIES AND CONTROL OF WORKING PEOPLE & COSTS IN A REFINERY Cost control is a very important issue during current economical context. The case deals with the analysis of variability of Ordinary Maintenance management process and it is aimed at defining measures to minimize it. Process variability of Work Order flow is the cause of many UnDesiderable Effects (TOC word used to mean ) e.g. Corrective Maintenance budget overrun; unpredictable monthly maintenance costs; difficulty in preventive maintenance scheduling; differences between planned and executed tasks, unsustainable of plant reliability, poor control of subcontractors and others. The application of TOC tool allowed to change maintenance budget definition and control process, achieving real savings about 10% of Ordinary Maintenance cost after only one year. Typical issue in the plants is: How to control costs to avoid budget overruns and surprises for Ordinary Maintenance?. The answer to this operation is always a complicated process. Recurring examples of causes, also called UnDesiderable Effects (UDEs) by TOC, are above mentioned 3

4 Mainly they are related to non optimal management of the maintenance process. So UDEs pointed out had to be removed because of their impact on maintenance costs. STEPS FOLLOWED The main steps followed to remove or minimize UDEs were: I. preliminary seminar and organizational assessment: focused to point out UDEs and their implications on the different maintenance flows. The actors were all people involved in the chain. II. optimization: definition of relevant process and action plan. In this phase the work team was fixed as well (2 or 3 key persons) III. variability analysis, determination of causes and limiting factors, by use of control charts IV. Optimum budget and the related control tools definition: during this phase, the management team defined the company maintenance process re-engineering, in order to remove all the non-physical constraints. V. Monitoring of the results and replication of improvement process for following years The wide fluctuation of Ordinary maintenance cost was due to: 1. NATURAL variability of maintenance process e.g. upsets 2. ARTIFICIAL variability of maintenance process (about 1/3) e.g. WorkOrder and maintenance task execution management for Ordinary Maintenance About NATURAL variability, it is strictly connected to Reliability Management. Indeed, it is due to failures and anomalies happening daily, related to reliability strategies. An experienced Reliability Engineering department can manage it by an extensive and continuously improved use of traditional Reliability Engineering tools, as: RCA (Root Cause Analysis), RCM (Reliability Centered Maintenance), RBI (Risk Based Inspections), etc. This kind of variability minimization requested a deeper analysis and an added effort, because of the complex scenario in which it develops. The amplitude of ARTIFICIAL variability is due to uncorrected adaptation or WorkFlow steps to the personal necessities of the single chain ring i.e. shift supervisor, unit head, maintenance supervisor, ect. In other words, ARTIFICIAL variability comes out from human contribute to maintenance task execution management. More the variabiliy, more the unnecessary costs. The root cause of this variability was a lot of unresolved conflicts that constraints physically the people to underperform. ACTION TAKEN & RESULTS The results achieved by the identification of the issues generating ARTIFICIAL variability were used for the preparation of 2006 Ordinary Maintenance budget. Jointly with Customer, apisoi management decided to change their consolidated and tradition-based process of cost control and budget definition. First step, the strengthening of Company culture in an extensive use of Risk Matrix. So the WorkOrder priority will be fixed by real plant needs. Planning and cost control departments shifted the maintenance budget control system from daily to weekly, because weekly gap revealed as the best The work team identified reliable indicators, as 1σ or 2σ, to monitoring the maintenance tasks program, by using control charts as well. Previous year 2σ data became the threshold to benchmark current year weekly cost amount: if weekly cost overrun it, reason for repair, correct use of Risk Matrix, scheduling and execution process, etc, were analyzed to understand why the exceeding of the cost Current year budget was defined on variability consideration, with expected savings of about 10% of previous year Ordinary Maintenance costs; actual saving has been around 6%, that can be considered a very good result as first approach. BUSINESS CASE 2 OVERCOME POLICY CONSTRAINTS MAINTENANCE DEPARTMENT IN A SME The maintenance manager of a medium company deals constantly with the same problem. He is measured on the basis of the machines downtime, but he does not have the possibility to chose the quality of the spare parts which currently are purchased solely on the basis of price. The purchasing manager, on the other hand, is measured on the basis of how much he saves on the purchase of spare parts. 4

5 The in the organization were: eccessive stock level, frequents stock out, eccessive machine downtime, customer unsatisfaction (the Murphy law strikes: when the most important customer is waiting for a crucial order, the machine breaks and the spare part are not avalaible..) and so on. There was in place a cold war between maintenance department and other department. Despite the efforts spent in IT systems, training, consultancy, in the last 3 year the overall performance did not improve. The maintenance manager drew the following cloud: Need of the System: have good quality spare parts Action The Maintenance manager buys the spare parts Common Objective Be profitable Figure 5. The maintennance manager cloud Need of the System: Exert control over the purchasing process Rule of the System Only the purchasing manager is entitled to buy This is a conflict cloud, although constructed in a slightly different way, and it can be evaporated, like any other cloud, by raising the assumptions and challenging them. The injection that evaporates the cloud defines the new authority needed for the person to carry out successfully and straightforwardly his/her task. Assumptions: 1. Only the purchasing Manager can strike the best deals 2. If anybody can buy you lose control of the situation Injection: 1. The maintenance manager is delegated to the purchase of the spare parts (and only spare parts) necessary to make the machines work at their best. Why is this so important? Firstly - each time somebody who is supposed to do something has to stop his work to ask somebody else s authorisation, an unnecessary inefficiency is introduced in our system ( graphically this is a loop in the flowchart of the process). Secondly - each time somebody has to ask for an unnecessary authorisation, he/she will feel less responsible/motivated/committed to the successful completion of his/her task. A system plagued by misalignments can be thought of as a well trained runner having to race with heavy stones in his pocket. Resolving misalignments is equivalent to getting rid of the stones. The second, but not less important aspect in empowering people is the ability to communicate clear instructions. The overall process of building the cloud, finding the injection(s) and planning the realization of injection(s) takes 2 months. The extra costs linked with this unresolved conflict are estimated in 300k euro / year in the last 3 year. In the 6 months following the adoption of the new procedure based on the injection, the extra costs decreased about 50%. 5