In the first part of the article I contradicted Kaizen with traditional costing systems and I made a preliminary description of the nature of Kaizen and why it is considered to be much more than a costing method, in fact a new operational philosophy. The first article is to be found in my home page in LinkedIn.
How does this work in practice within an organization? When companies adopt Kaizen:
All employees, are stimulated to propose improvements and experiment with innovations. This can be done at the Gemba (with proper supervision) or at regular intervals during breaks or before the shifts begin.
Management support proposals of new ideas, and stimulate experimentation. In fact, management hold employees accountable for proposing improvements, as part of their regular job.
Quality Circles are formed with the twofold purpose of both stimulating innovation at higher (than the shop floor) level and transferring knowledge across the organization. Quality circles are interdisciplinary, multifunctional groups of employees. As the term denotes, members of the group represent multiple departments of the organization and are knowledgeable of more than one disciplines. Think for example finance professional with knowledge of Operations Management. The QC composition ensures all business aspects are considered (e.g. finance, operations, logistics, sales, marketing, after sales, engineering, development) before proposals for major process optimization / innovation are submitted. Duration of membership in the teams ranges from some days up to an unlimited period.
The dynamics of such a group, result in a total that is greater than the sum of its parts. Highlighting multiple areas of the business should help secure optimum results, transfer knowledge and champion innovation across the organization, and overcome resistance to necessary change as all related departments have been represented in the QC.
Let’s take a simple example where various tests performed by manual workers at the production site of a car manufacturer confirm that 2 new features can be added to the breaks of an existing model. It is preliminary tested and it works, this is the result of small incremental improvements at the site. These features will lead both to the prolongation of the Expected Useful Life of the breaks (say from replacement every 1.5 to 2 years) and improved performance. Before deciding to invest in the machinery that will add this feature to all models of the brand (assuming this is a considerable investment), the organization needs input regarding the following areas from its QC:
Availability of necessary finance & cost of capital to obtain the funds?
Technical ability and feasibility of innovation?
Acceptance of this new feature by the market?
Is this indeed a value-adding feature for which the consumer is willing to pay, say, an extra $300, assuming this costs the company $240?
Will this give the entity a competitive advantage?
Will the company be able to launch it to the market sooner than the competition?
Will this innovation be the first of many to follow in this area?
It is important to realize that the answers to these (and many more) questions will be optimized when members of the QC see themselves as serving the entity as a whole with the constancy of purpose of creating value for the consumer and the shareholders, and not defending their departments’ interests against the common good. Doing good through continuous improvement (Kaizen) is therefore a philosophy that permeates all aspects of the organization and requires adequate support from the top.
Contrast the approach outlined above with the Variance Analysis / Cost control explained at the beginning of the Article, it will be a good exercise to realize for yourself the difference in viewpoints. The aim of the Standard Cost card, Variance Analysis approach would be to ensure that processes that are believed to be infallible are strictly followed in order to adhere to predetermined standards that are unquestionable, and ensure no cost overriding occurs. There is no focus on innovation, process improvement, value creation, and proactivity.
Corporate Culture and Kaizen
The paradigm shift in the Corporate Culture of organizations implementing Kaizen, does not happen overnight and without overcoming resistance to change. The importance of achieving such a shift however cannot be overstated, as it may be the main key for securing a sustainable competitive advantage.
Case in point of Kaizen: how to transform Corporate Culture on the pillars of:
Employee derived excellence, based on quality oriented Human Resource Policies and Strategies. An organization’s primary aim is to enable its staff become decision makers and innovators, achieve continuous self-fulfillment and by so doing ensure financial competitiveness for the Shareholders.
Customer focused operations from A to Z (meeting and exceeding client expectations).
Process Innovation leading to product and service innovation.
Financial Competitiveness in terms of both profitability and wealth creation.
Sustainable Financial Competitiveness will be the end result of the Kaizen practices, which themselves must fulfill a greater scope of management excellence. In other words, as important as Financial Competitiveness might be, its degree and sustainability depend on the solidness of the pillars to which it is based upon, which are pillars 1-3 mentioned above. Short term margin improvement achieved through, for example, ad hoc downsizing is not only an inadequate strategy on the long run but an arrogant attempt by organizations to achieve financial success without improving their services and products by creating value for the clients. Short termism that aims to improve financial performance while ignoring the determinants of value creation is a typical case of ‘putting the car before the horse’. It may last for a couple of quarters but it will hardly secure long-term viability.
In order to create and sustain a Kaizen culture, we need comprehensive and well rooted Human Resource Policies and Strategies.
The paramount aim of Kaizen, is to achieve a shift in an organization’s Corporate Culture, so that the latter enhances a continuous focus on process improvement, value creation, subsequently resulting into the increase of the shareholder’s wealth.
One of the most often cited quotes from Peter Drucker is that “Culture eats Strategy for breakfast”. Organizations that aim to succeed by means of Kaizen do wise to realize early on, that the only way Kaizen will be effective is by achieving a paradigm shift in the Corporate culture. Pre-Kaizen Corporate Culture is Kaizen’s ultimate victim. Management that understand Kaizen and want to see it succeed in their organization are dissatisfied with the present status quo of re-activeness, short-termism, firefighting, lack of innovation.
Post-Kaizen Corporate culture will be characterized by: employee focused motivational schemes aiming to achieve the highest levels of quality out of which process and product/service innovation will result, leading to financial competitive advantage. Main tool to achieve set goals is the individual at 3 distinct levels:
The employee and his needs for self-fulfillment and the capabilities she/he can put into practice for personal growth at the organization’s benefit. Employees are considered to be the most valuable Asset of an organization and the Board have the moral duty to see that they provide the best possible means to their staff at all levels to achieve self- fulfillment and obtain the maximum input from their staff for quality improvement and innovation.
The customer whose needs and expectations must be met and exceeded, primarily by Continuous Improvement of processes and products/services initiated and implemented by the employees.
The shareholder. The ultimate purpose why profit-seeking organizations exist is to increase the wealth of their shareholders. Process innovation and excellent products/services are determinants of the increase of the Shareholder’s wealth.
Kaizen centered organizations realize that the interests of these individuals are not in conflict; truly motivated and satisfied employees produce optimum results at both process and service/product level, for the benefit of customers and shareholders. They do so through Continuous Improvement of manufacturing processes and service rendering at an ever improving pace and versatility. Management’s job is to ensure employees’ capabilities are optimized by encouraging them to continuously propose, and experiment with, incremental improvements of processes and products. This is the way to achieve employee commitment, sustainable margin improvement, and product innovation.
We just described the raison d’etre of Kaizen, in a nutshell.
Kaizen is also based on the conviction that empowered employees that are willing to take on the responsibility for improving the daily processes in which they are involved, are more prone to be held accountable for achieving the revised standards that result from these improvement and to live up to the increased expectations to continuously improve their scope of work.
“Creating a Kaizen culture”, Miller, Wroblewski, Villafuerte / Mc Graw Hill, 2014
“The machine that changed the world:, Womack, Jones, Roos / Simon & Schuster, 2007
Date: August 2014
By: Chris Ragkavas, BA, MA, FCCA, CGMA
StudySmart management consultant, senior finance & accounting tutor, IFRS technical expert