Operational Excellence

In, the post Is Operational Excellence Dead? the argument is made that operational excellence is dead as a differentiator of companies. “All of the emphasis on outsourcing to low labor cost countries seems to imply that organizations no longer consider their operations strategic.” I would state that, in fact, the opposite is true.

Leading companies, for years, have focused on continual improvement. Toyota is the best known example. They drove the adoption of just in time inventory and then other lean practices. Dell, Southwest, Amazon and Walmart are further examples of companies that have focused on operational excellence.

Dell has continually improved their operational performance and has been growing dramatically (both by expanding the market and by taking market share from their competitors). Dell’s advantage is almost solely in operational excellence. They are not know for product innovation or traditional customer service (compared to say IBM or Hewlett Packard). They have redefined customer expectations in a way that works very well for them. When Dell’s competitors try to compete by combining forces (such as Hewlett Packard buying Compaq) they continued to lose market share. I would say they lost market share almost exclusively due to Dell’s incredible focus on improving the performance of their operations.

Those companies that try to compete by outsourcing without management improvement will not be successful. There are situations where “outsourcing” would work well, for example, if a company had a competitive advantage in innovation and then they outsourced production to a company that focused on operational excellence in production (like Toyota, Dell or Solectron). This type of arrangement requires partnering with your suppliers in the way Dr. Deming taught Toyota in the 1950s.

Now many companies talk about partnering with their suppliers. The difference between those that are having great success and those that are fighting to stay alive is in the implementation of the concept. Saying the organization is focuses on new principles (partnering, lean, etc.) is not the same as applying those principles with the great success that Toyota does. That difference is huge and is driving many companies to outsource and try to dramatically cut costs. Reducing costs should be the outcome of improving efficiency.

Toyota is successful manufacturing in the USA. Dell is successful manufacturing in the USA. The key for those companies are managing effectively, not cutting costs. The focus in on lean principles, cutting all waste, never ending focus on how to make huge, or tiny gains in efficiency. Not on cutting costs for the sake of cutting costs. The difference may seem minor but the results are worlds apart.

I would agree that many companies don’t understand the critical importance of management excellence. Rather than take the difficult path to lead real change in their organization they focus on simple cost cutting measures (though usually not cutting executive salaries which have grown dramatically and are excessive in the USA compared to the rest of the world). That won’t work. You can’t compete with companies like Amazon, Dell, Southwest, Toyota and Walmart without managing your company with every increasing effectiveness and efficiency.

Suggested reading (to improve the management of your organization):

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One Response to Operational Excellence

  1. Pingback: CuriousCat: Cost Cutting is Much Different than Waste Removal

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