Introduction

What makes a good process? When a process operates, how do you determine whether it is
successful or not? Processes seem simple, yet seem to cause so many problems and the
very word 'process' can strike fear into the hearts of many people.
If you are leading any type of process improvement program, you have probably felt at times
like your efforts were yielding less-than-expected results. It is no wonder: the list of possible
hurdles to overcome restrictive organizational structure, politics, stagnant organizational
culture, power trips goes on and on.
Continuous Improvement is the on-going effort to improve products, services and processes
by making small, incremental improvements within a business. It is based on the belief that
these incremental changes will add up to major improvements over time and it is as much
about tactics (i.e. specific improvements) as it is about changing the culture of the
organization to focus on opportunities for improvement rather than problems.
At the other extreme, there is the Business Process Reengineering which advocates starting
from a clean slate with a quantum leaps. Whatever techniques/methods is used it relative
the pulse of an organisation.

Your objectives
In this chapter you will learn about the following:

Understand the 3 Es of operational excellence

Understand the importance of the 3 Es
Understand the techniques/methods to achieve the 3 Es
Understand how to acehive the 3 Es in the business context

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1 What is the 3 Es
Businesses have a tendency to focus on one or other of the three Es as shown in Figure 4.1
:

Figure 4.1

DEFINITIONS
a. Economy doing things as cheaply as possible, avoiding spending more than is
necessary
b. Efficiency doing things as smoothly as possible, eliminating processes and
activities that do not lead closer to the finished product.
c. Effectiveness doing things as well as possible, making sure that the end result is a
close match to what the customer actually wants.

Excessive economy can cause problems in production/delivery, as components fail more

frequently, thus reducing efficiency. Or producing a product that is just too low quality for
what customers want. Too much focus on efficiency can leave a company paying over the
odds for the best parts or services. Or removing processes that customers actually value,
leaving them less satisfied. And if the attention is exclusively on effectiveness, then costs
can quickly get out of control and activities that dont add real value will creep in.
Economy plus efficiency tends to create a low-cost strategy, where the cost of sale is driven
low to allow competition on price alone. Economy plus effectiveness will drive a budget
strategy with customers getting most of what they want at a price that seems very good
value. And efficiency plus effectiveness will tend towards a premium strategy, giving the
customer a smooth delivery of what they want, but at a price.
You will often hear these three Es described as a kind of hierarchy, with Effectiveness being
at the top of the tree. However, they each have a part to play in building a successful
business, and it is the combination of all three that brings the final E Excellence itself.

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2 The importance of the 3 Es

Consider the impact of processes that are not enjoyable on the business results. The most
obvious negative impact is that if the work is boring or painful, your people will not be happy,
which is the thin end of the wedge that drives straight into the other result areas. Feelings
are highly infectious, and if you were an operations management, your people are unhappy,
they will spread their misery to your customers, which will, shortly afterwards, ripple on to
depress your business results. You will even lose out in social responsibility, as unhappy
people will be less inclined to be good citizens (especially on your behalf).
No one E is an island. We can create processes that are Efficient at the expense of
Effectiveness and vice versa. Similarly, we can have fun processes that are neither very
Effective nor Efficient. The challenge, then, is to find the balance that leads to optimal scores
in all of your Results sections. This will be the point of maximum synergy, where Efficiency
gains remove the boring parts, giving people a more interesting challenge, where
Effectiveness leads to satisfied customers which feeds back to employee satisfaction, and
where Enjoyable processes lead to happy people who work sincerely towards improving the
other two Es.
If your people are really your greatest assets, then design the pleasure of working for you
into your processes. Add challenge, respect, care. And even fun. And you will be rewarded
by results that move upwards in all areas.
Using techniques /methods as described below, for example; while not every company can
achieve results at this level, lean production does provide a wide range of benefits, including:
Reduced inventory
Improved quality
Lower costs
Reduced space requirements
Improved financial performance
Reduced cost
Improved quality
Enhanced staff moral
3 Techniques/methods to achieve the 3 Es
3. 1 Lean/ Just in Time
Lean systems are sometimes referred to as just-in-time (JIT) systems owing to their
highly coordinated activities and delivery of goods that occur just as they are needed.
The lean approach was pioneered by Toyotas founder, Taiichi Ohno, and Shigeo Shingo as
a much faster and less costly way of producing automobiles. Following its success, today the
lean approach is being applied in a wide range of manufacturing and service operations.
Lean systems are sometimes referred to as just-in-time (JIT) systems owing to their
highly coordinated activities and delivery of goods that occur just as they are needed. The
lean approach was pioneered by Toyotas founder, Taiichi Ohno, and Shigeo Shingo as a
much faster and less costly way of producing automobiles. Following its success, today the
lean approach is being applied in a wide range of manufacturing and service operations.
Lean is a production practice with the key tenet of preserving value with less work.
Operations that fail to create value for the end customer are deemed wasteful. Eliminating
waste and superfluous processes reduces production time and costs.
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The seven wastes listed by Japanese founders Toyota are transport, inventory, motion,
waiting, overproduction, over-processing and defects. The tools for implementation include
value stream mapping, kanban pull systems and poka-yoke (mistake proofing).
Leans mantra of doing things better leads many companies to view it from a cultural
standpoint. Think of it like recycling for it to work, it has to be more than an arbitrary
process, and actually be engrained in society. For Lean to be successful, it has to permeate
the business silos and receive universal backing amongst senior management and
employees.
The kanban system is actually very similar to the reorder point system. The difference is in
application. The reorder point system attempts to create a permanent ordering policy,
whereas the kanban system encourages the continual reduction of inventory. We can see
how that occurs by examining the formula for determining the number of kanbans needed to
control the production of a particular item.

Why would you use it?

Leans strength is its fast implementation. Immediate benefits relate to productivity, error
reduction, and customer lead times. Long-term benefits include improvements to financial
performance, customer satisfaction, and staff morale.
The three principles of Lean leadership and thinking challenge oneself to meet goals,
kaizen (continuous improvement) and genchi genbutsu (going to the source - the factory
floor to make informed decisions) are well respected.
Process-orientated industries with clearly defined value chains particularly those with
manufacturing or supply-chain elements -are the most receptive to Lean methodology.
These include automotive, industrial engineering and pharmaceutical industries.
Lean and Six Sigma are often used in conjunction with one another in value chain
improvement. Six Sigma process mapping does not distinguish between information flow
and product material flow, because they all come under the process umbrella. The Lean
discipline of value stream mapping leads many exponents to miss how information
processing by departments can hinder the order to delivery cycle. Combining techniques
makes it easier to measure and execute on lead times.

Who created it?

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Lean was based on the 1980s Toyota Production System, and covered all facets of the
manufacturing business, from quality assurance to human resources.
The concept of Lean emerged over time, as Toyota engineers developed solutions to
overcome problems that beset the company as it grew from humble beginnings into a global
superpower. In this respect, Lean is an organic, flexible system.
Whats the future?
Leans relatively simple methodology and ability to attack a very transparent evil waste
make it an integral part of manufacturing and service industries. It is a far less abstract than
BPM, for instance.
Leans future may rest on the translation of its methodology from the manufacturing floor to
more unconventional settings. 5S standardised work stations may have a future in research
and development labs, but not the everyday office.
According to Gartners Hype Cycle of new technologies, Lean and Six Sigma are past the
peak of inflated expectations and the trough of disillusionment, and depending on the
company, are climbing the slope of enlightenment or traversing the plateau of productivity.
Whether its as a philosophy, a fixed state (being Lean), a methodology (performing Lean) or
a cultural transformation (becoming Lean), it has a veritable future.

ACTIVITY 1
(15 MINS)
Julie Hurling works in a cosmetic factory filling, capping, and labeling bottles. She is asked to
process an average of 150 bottles per hour through her work cell. If one kanban is attached
to every container, a container holds 25 bottles, it takes 30 minutes to receive new bottles
from the previous workstation, and the factory uses a safety stock factor of 10%, how many
kanbans are needed for the bottling process?

3. 2 Six Sigma
Six Sigma is a set of tools and strategies to limit defects and variability in business
processes, with the overarching goal of process improvement.
Its two project methodologies DMAIC (define, measure, analyse, improve, control) and
DMADV (define, measure, analyse, design, verify) are based on Demings Plan-Do-CheckAct cycle.
Six Sigmas implementation rests on a dedicated improvement team divided into hierarchies
based on a belt accreditation system. The team leverages advanced statistical techniques
such as pareto charts and root cause analysis to reach quantified value targets.
Why would you use it?
Six Sigma is a multifaceted methodology. To the statistical engineer in manufacturing, it
might simply be a production quality metric, but to a customer service employee or CEO, it
may embody the corporate culture.
Broadly speaking, its a quality improvement methodology that provides a framework for a
company to train its employees in key performance areas, shape strategy, align its services
with customer needs, and to measure and improve the effectiveness of business processes.
Fundamental to the latter is the identification of KPIs, and a focus on process quality
variation.
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Who created it?

It was first outlined by Motorola in 1985 as a statistical modeling of manufacturing
processes. A sigma rating relates to the percentage of defect-free products. A sigma rating
of 4.5 (3.4 defects per 1 million) was initially touted as a realistic benchmark, with 6 sigma
representing the holy grail.
Six Sigma was popularised by then CEO of General Electric Jack Welch in 1995, and by
1998 he claimed that it had led to $750 million in cost savings. By the late 1990s, two thirds
of Fortune 500 companies had incorporated Six Sigma projects, and by 2000, the discipline
had spawned its own training and consultancy programs.
Whats the future?
Six Sigmas traditional stomping ground manufacturing seems to be looking beyond
quality control to foster an innovation culture. But for industries such as financial services,
which demand a unique customer focus and struggle with a glut of data, Six Sigma
represents the perfect partner.
Criticism of Six Sigma centres around its lack of originality beyond traditional quality
improvement methods, implementation time (a minimum of 3 months), potential to stifle
innovation, and the 1.5 sigma shift.
However, the proliferation of training courses, support organisations, and the fact that the
average Six Sigma Black Belt commands a salary of $90,000 all point to its longevity. The
skills to identify and quantify variation are strongly valued. As long as companies continue to
see a positive ROI from Six Sigma projects, it will survive.

ACTIVITY 2
(15 MINS)
Explore how would you use lean and six sigma methodologies to contribute towards
operational excellence of your organisation?

3. 3 Business Process Management

BPM is a management approach that looks at an enterprise holistically as a set of business
processes. Contrary to popular belief, the software associated with BPM is only a means to
an end a tool to understand, engineer and analyse processes. BPM leverages a five step
design model design, model, execute, monitor and optimise. Six Sigma may be used to
improve processes, before BPM looks to automate and manage them.
Why would you use it?
Most enterprises are divided into departments with idiosyncratic functions. The customer has
a different perception of the enterprise, understanding it through the business processes
through which he or she interacts. For example, a customer applying for a loan views the
company as a loan provider, not as a group of departments such as sales, underwriting,
legal and compliance, I.T. etc. Customers demand transparency and a seamless, cohesive
experience. BPM looks at mitigating the effects of siloization by helping organisations
manage complex, cross-departmental processes, and synchronizing them with customer
demands. Its the methodology to link improvement and process design efforts directly to the
management system and organisational strategy.
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Although its somewhat of an abstract term, BPM initiatives in one guise or another - have
been adopted by financials services, telecoms, healthcare and military sectors.
Who created it?
Some experts trace BPM back to 1993, when consultants Michael Hammer and James
Champy published a seminal book on business process reengineering.
This is disputed by champions of Smith and Fingars book: Business Process Management,
The Third Wave, who denounce BPR for its shirking of execution. Execution is facilitated by
the business process management suite. If the precise origins of BPM are somewhat hazy,
its safe to say that the 2000 dot-com boom created a flourishing vendor market where
integration focused platforms merged with pure-play BPM.
Whats the future?
The exponential growth of BPM vendors (Appian was north of 50 million in revenue last
year) points to a rosy future for an approach credited with helping companies emerge from
the recession with their processes still intact.
BPM as a group of factory-style sequential workflows may be outdated, but BPM as a
dynamic model that incorporates business and process intelligence, and tools such as
predictive analytics, is very much alive. Going forward, mobile, social, predictive and cloud
BPM appear to be the hottest trends

ACTIVITY 3
(15 MINS)
What is the most critical factor in making an improvement initiative successful?

3.4 Activity Based Costing

What is Activity Based Costing and how does its use support operational excellence?
Activity base costing (ABC) is a requisite for operational excellence. Most importantly,
activity based costing helps you allocate overhead to each product more effectively, instead
of using ratios based on a percent of direct labour dollars, pounds per labour hour, or line
hours. With ABC, the primary cost driver for each expense group (cost centre) is identified,
and then product specific percentages are derived for each cost driver. For example, rental
expense is allocated to each product based on the percentage of floor space that product
occupies. Engineering or sales wages and benefits are allocated to each product or service
based on the amount of time each engineer or sales person reports spending on a given
product. Human resource costs might be allocated to each product based on the number of
labour hours worked per product.
The key is that the cost driver type varies with each cost centre no single set of multipliers
is used to allocate all overhead costs. Using activity based costing helps more clearly define
a products or service's true profit margin, instead of allowing one product or service to carry
an excessive amount of another products overhead burden. For example, I have seen one
candy bar type essentially die on the vine because it was carrying an excessive amount of
sanitation labour costs. Because sanitation costs were allocated based on line hours of
operation (both products ran for the same amount of time each week) instead of on the
sanitation hours that were actually needed to clean the line (the other product was very
messy, and required twice as many people to clean it), the 'easy to clean' products profit

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margin was understated, and in turn, management was hesitant to try to grow that brand.
Additionally, the profit margin for the messy product was overstated.
Activity based costing also helps an organization focus more on transaction costs instead of
merely managing to a budgeted number. In an operationally excellent organization, the goal
should be to consistently drive down the cost per transaction (i.e. the cost per pound or the
cost per customer served) in EACH process area, not just overall. ABC helps nonproduction groups in particular, because it helps clarify the primary reason they exist. For
example, what is the human resource cost per person hired or per employee? How has this
number changed over time?
4 How to acheive the 3 Es in the business context
One huge obstacle for achieving process excellence is working in traditional, functional
specialist siloes. There are key factors for bringing those functional siloes together to
advance process excellence.
An example is point is IT companies providing software-consulting services in Scandinavia.
IT companies are cradles of functional siloes. People are actually eager to work in siloes and
promote their own niche expertise (for example Scala programming skills, Enterprise
architecture, project management, etc.). But how many times those IT companies fail to
produce a software that actually helps the customer to solve a business problem and make
their lives easier? Based on some researches, only one time out of five. Lets look into these
tips and come back to this real-life example at the summary.
4. 1 Three Key Factors to Achieve Process Excellence
#1 Customer Centric Process Culture
Changing the organisational culture to be both customer centric and process oriented
is very important, because that way the organisation will start to align itself
automatically towards process excellence. Customer centricity gives the processes
the reason to exist and process orientation makes sure that the organisation is
providing added value to customer as efficient way as possible. But you cant really
imprint this on the organisation and therefore you need to grow it as part of the
organisational culture.
Your organization needs a culture, where focus is on mastering processes from a
customer-oriented process perspective Build in competitive advantage in delivering
value to customers. If your organisation has a genuine focus on the customer the
customer will become everyones business, no matter what functional silo the person
represents in an organization. Even people in internal roles should be doing
something that enables others to serve customers. Always seek customer
satisfaction and value through fulfilling their identified, true needs through business
processes. Make your employees to understand that customers will always want
something, but even more important is to know what they really need.
#2 Shared goals and metrics
Shared goals for the whole organisation and key measures for gauging business
performance, gathering the necessary data and analysing it using key variables is
very important. You get what you measure for, but keep in mind that turnover, growth
percentage and other faceless, corporate measures do not touch the hearts of
people and therefore wont lead to results either. Instead, build your balanced
scorecard from customer-oriented perspective and make sure everyone sees and
understands those results in the same way. Even HR and financial department
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people need to be connected to customer outcomes through what they do. With
every KPI that you have ask How does this help my customer to succeed? That will
help you to think internal matters of an organization from customer-oriented
perspective. If something does not contribute to providing great customer
experiences in a profitable way, get rid of it.
When using metrics, remember that extrapolating from the past doesnt work. You
cannot predict the future from what has happened yesterday. The reason is very
simple: the world and the customer changes all the time. The history wont tell you
what will be the next thing the customers get interested of. Those companies who
extrapolate from the past wont innovate something new and inspiring for their
customers. They will be only a blend-improved version of what already was.
Therefore, use the metrics to guide the behaviour of people to the right direction,
ensuring success in future.
#3 Removing organisational barriers
It is very beneficial to remove organisational barriers through creating boundaryless
collaboration culture Break down organizational barriers to improve teamwork
throughout the organization. It might be best to have truly process-oriented structure
in your organization, so that everyone gets what he or she need to do to provide
profitable customer experiences. Do not support old-fashioned silos that prevent
people from collaborating.
Also train and coach management to be proactive Set goals for providing customer
experiences, review them frequently, establish clear priorities and focus on problem
prevention rather than resolutions after the fact. Have your people anticipate
problems before they even occur. Cost of fixing a cause of problem is lower when
detected earlier. Have people working in teams towards shared goals, without
artificial siloes preventing genuine collaboration.
Support a drive for perfection, combined with a tolerance for failure You must be
willing to try new ideas and approaches that have some risk of failure in order to
make changes leading to perfection. Just make sure that you learn from your
mistakes that you will make on the way. If you cannot extract a teaching from a
failure, you better stop trying. No failure is a failure, if you learn something from it; it is
just a way not to do that thing (like Edison concluded while trying to create a light
bulb). And that is only possible when everyone is working together in an organisation
regardless of their position, title, department, gender, age or anything else. Those
people, who do not contribute to shared goals, need to look for other place to work,
because there is no place for free riders in boundaryless organisation.
5 Factors that Make a Continuous Improvement Program Successful
Continuous Improvement is the on-going effort to improve products, services and processes
by making small, incremental improvements within a business. It is based on the belief that
these incremental changes will add up to major improvements over time and it is as much
about tactics (i.e. specific improvements) as it is about changing the culture of the
organization to focus on opportunities for improvement rather than problems.
Here are four factors that are essential to successful continuous improvement programs:
1. Leadership that walks the talk
The support of an organizations leadership team is usually cited as the number one factor
for the success of a continuous improvement initiative. Leaders must exhibit behaviours that
not only demonstrate support for the initiative but also the behaviours that they wish all
employees to emulate. This ultimately comes down to guidance and the support within the
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organisation to make the change. If there is not adequate support for a continuous
improvement program to be implemented, then the team charged with implementing it will be
operating on what will be, in effect, a series of isolated efforts.
2. A focus on fire prevention rather than fire fighting
No individual, team or company can implement change if they dont have the time or mental
capacity to do so. The trouble is that often it is often the very problems that need fixing that
are creating a series of fires that constantly distract managers from solving the root cause
of their problems. Everyone is constantly having to work harder, rather than smarter. Worse,
some company cultures celebrate and reward those employees and managers who put out
the most fires, which removes incentive to prevent the fires in the first place.
3. Constancy of purpose
In Dr. W. Edwards Demings 14 points he called for the constancy of purpose for continual
improvement of products and service to society. This unrelenting, unwavering focus on
improvement is critical to maintaining and sustaining process improvements in the long term.
Changes need to maintain momentum to ensure the changes are not forgotten and dont
grind to a halt through fatigue or resistance. Successful continuous improvement programs
understand that improvement is not merely a management initiative a so-called flavour of
the month but a long-term practice that needs to permeate everything an organization
does.
4. Shift to long term mind-set
Managers are often focused on whether theyre going to meet their monthly or quarterly
targets and it can be very difficult to prioritize improvements that will only make an impact
over the longer term. As a result, continuous improvement is as much about mind-set as it is
about actions. The company needs to start looking at the long-term impact of the work it is
doing and understand that a quarterly dip in performance can be tolerated if it means that in
the long term, the company is in a better position - both financially and in terms of the
companys ability to deliver outstanding products and services to its customers.

ACTIVITY 4
(30 MINS)
Realising it is not possible to effectively using all the 3 Es of operational excellence, explore
the building blocks of competitive advantages in a restaurant of your choice.
QUICK QUIZZ
1. Performing the task right and considering the relationship between inputs and
outputs are
A. effectiveness.
B. goal attainment.
C. efficiency.
D. management characteristics.
2. Actually doing the right task is known in management as which of the following?
A. effectiveness
B. strategic management
C. efficiency
D. management characteristics
3. What is the difference between efficiency and effectiveness?
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4. Can the 3 Es of operational excellence be achieved all together? Yes or No

5. Is culture an issue when implementing the 3 Es of operational excellence? Yes or No
ANSWERS TO QUICK QUIZZ
1. C
2. A
3. Efficiencydoing the thing correctly; accomplishing the goal with the least amount of
resources.
Effectivenessdoing the right task; goal attainment.
4. No
5. Yes
ANSWERS TO ACTIVITIES
1.

2. Stated simply, the goal of any lean initiative should be to minimize waste while
maximizing customer value. In an operationally excellent organization, lean practices
are applied to all key processes, not just those of a operations nature. Additionally,
value is defined from the perspective of both the external and internal customer in a
measurable manner it is not just what management thinks the customer wants.
Lean tools are just that - a set of tools that can be used on a regular basis to help you
pursue operational and process excellence.
According to Womack and Jones, there are seven types of process waste rework,
overproduction, excess inventories, non-value added process steps, excess people
movement, excess material transportation, waiting, and non-value added goods of
services. Common examples of process waste incidents in organizations include
accidents, rework, downtime, material waste, absenteeism, equipment damage,
product damage, customer complaints, and lost customers. A variety of lean tools
are used to reduce and minimize these common causes of waste across the
organizations value stream (from supplier to end customer).
Six sigma at its core is simply a measure of process variation. In an operational or
process excellence world, process variation is both known and minimized as much
as possible through the use of effective waste stream identification, root cause
analysis, and project driven systems change. Kaizen and six sigma teams are used
to support the daily continuous improvement efforts of each process owner, but they
are not seen as the sole drivers of the operational excellence initiative. Too many
companies are currently making this mistake - they are striving towards operational
or process excellence as a goal, but they are (1) relying primarily on their kaizen or
six sigma teams to drive their process improvement efforts and (2) in turn failing to
attain high levels of employee engagement in the pursuit of process excellence.
3. This is a tough question, because I am torn between two possible answers. An
improvement initiative will not succeed if time is not allocated towards it, and that
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time, if allocated, is used effectively. That said, an organization can allocate this time
on paper (in a strategic plan, job description, or expense budget for example), but fail
to require EACH of its leaders to demonstrate the degree to which they are
personally using this time to improve the key processes they are responsible for. If I
could only change one thing, I would change what I expect from each of my leaders,
because most people will find a way to reach a goal if that goal is clearly stated,
along with significant consequences for failing to achieve that goal.
4. Building blocks ideas recommended

Figure 4.2
As in Figure 4.2, the restaurant will need to provide food service more efficiently and
effectively than its competitors if it is going to survive. The restaurant will need to achieve
superior efficiency, quality, innovation, and responsiveness to customers.
Middle managers can increase efficiency by finding suppliers who have competitive
prices and who are flexible in their ordering processes. Management can also increase
efficiency by effectively training kitchen staff and wait staff to perform at a high level.
Quality in food and service will also help ensure the success of the restaurant. Wait staff
should be encouraged to be friendly and professional, while kitchen staff should be
encouraged to use high quality ingredients and methods for preparing food. The
restaurant must be kept clean and attractive to provide a pleasant dining experience.
In addition to providing quality food and service, employees should be empowered to be
creative; to develop better ways of doing things. Weekly or biweekly staff meetings
should make use of employee suggestions for promoting new menu items or increasing
customer feedback.
Responsiveness to customers is vital to service organizations such as restaurants. The
success of the restaurant depends on the staff to provide quality food and service at
reasonable cost. Employees should be empowered to do whatever it takes to satisfy
customers and make their dining experiences pleasant
REFERENCES

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1. Operations Management by Schroeder, Contemporary Concepts and Cases

Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Crating Value Along the
Supply Chain 7th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill

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