Join the conversation as Mark Siwik, founder of SandRun Risk, conducts this interview series with Dr. Robert Hall, Professor Emeritus of Operations Management, Kelley School of Business, Indiana University.
Part II focuses on Hall’s creation of a new pathway – Compression Thinking - to meet the challenges of the 21st Century.
Part 3 concludes with a discussion of risk management issues that may confront current and future business leaders.
SandRun Risk (SR): Risk management is a business discipline that has a high failure rate. Have you observed the same phenomena with disciplines like “lean?" What do you think are the major stumbling blocks?
I’ve never personally engaged in risk management as a business, so I didn’t know that it is high risk. That’s ironic, but logical. Our supreme risk is obsolete mindsets. The risks to risk management seem similar to those for lean: a shallow understanding of what it is, belief that it can be grafted onto present business policies, lack of human development (executives as well as workers), and in the case of lean, unwillingness to relax financial control of operating processes.
Visible lean is the operational surface of a different concept of why a business exists and how it should be governed – at least as compared with a strictly investment view of it. A novel idea, for many, is that a business needs a significant social purpose beyond just being a money machine, one that inspires people to execute their work flawlessly as well as quickly.
Priorities at the gemba level, where work is done, are in the following sequence, most important first: safety, quality, delivery, efficiency, flexibility, and resilience. In a well-developed process, each of these factors reinforces the others. Lean is not a single-minded pursuit, as for cost reduction in the minds of financially obsessed managers.
The interpretation of that first priority, safety, has broadened over the years. It needs to keep broadening from seeing risks in changing to seeing the huge risks in not changing.
Fires in plants are classic risks. Toyota, the Godfather of lean, had at least two fires in supplier plants that would have crippled less prepared companies. Naysayers averred that those debacles spelled the end of just-in-time; that Toyota was too lean in inventory. Didn’t happen.
Instead, Toyota deployed flexibly trained workers and system flexibility – the hidden side of lean. They responded to the fires by going into fire drill mode. Production quickly shifted to a sister plant. Usable equipment and tooling moved from the stricken plant; spare equipment and tooling rolled out. Operators from the burnt plant transferred to the backup plant, working around the clock. Within a few days, they restored full production. That’s Toyota’s lean antidote to business continuity risk.
These fire stories are last century’s news, but even among “lean practitioners,” few managers fully absorbed the lessons. They are stuck on a wimpy version of lean as cost reduction. However, safety even in a physical sense did not become top priority at Toyota until they opened foreign plants. Until the 1980s, a consistent stream of foreign earnings was top priority. Japan needed the trade surplus to feed its population. Workers took risks as a patriotic duty.
Now Toyota – and its industry – faces huge risk from its past success –existential risk. Change drastically or die. Electric drive is coming. Autonomous drive is coming. Vehicle sharing is catching on. Vehicle use is restricted in congested cities; why own a vehicle if the street is a parking lot and parking is $40 per day. Only 25% or so of Manhattan residents keep a vehicle.) Some insider prophets of the industry opine that within 10 years, car sales and dealerships will be a memory. Will builders design and build cars for companies that face the public with names like Uber and Lyft? Maybe.
In addition, more governments are requiring that all vehicles be re-built or recycled. This began in Europe; BMW even experimented with automated disassembly plants. Fuel economy standards keep tightening while buyers go for big vehicles and luxury vehicles. Given the present system, the industry is compelled to chase profit, but suppose fuel prices suddenly shot to $10/gallon? Any of a number of causes could trigger that scenario.
The trend and flexibility leaders now are not Toyota or any other big OEM. They are companies like Local Motors. Bodies are designed and built 3D. Both factories and design are located regionally, near where vehicles are used. Size and global reach may be a passé advantage. Big companies risk foundering in their own size and complexity. Mass production is losing its advantage. Vehicles now have at least 10 million lines of code, going for 100 million. It isn’t 1980 anymore.
Any automotive strategy is a gamble. The current business model will vanish; 100% guaranteed, but what will take its place? Even the legalities are up for grabs. If a self-driving vehicle is in an accident, who is liable? If it fails to function, who is qualified and insured to repair it? Maintenance depends on the great database in the sky; can it be hacked? And we haven’t gotten to the biggest risks of all, the environmental ones.
Environmental risks are often discounted or unseen by business mindsets. We bet big that companies and economies will grow; compound interest is a growth formula. Its arithmetic says that growth is unlimited; however, nature limits all growth. For example, tree height cannot exceed 400 feet; water can’t transport higher from the roots. Natural resources are limited. Fossil energy, sunshine trapped from thousands or millions of years ago, is limited; the easy pickings are winding down. Then there’s climate change, water pollution, and a bunch of others, including encroachment on ecology. The last one is almost unseen, but human development robs other life of space. For example, we cut way too many weeds beautifying landscape, and why? To raise property values.
Sooner or later nature bites back, like herbicides provoking superweeds. We “maximize value,” but nature thrives by balance, so eventually it strangles maximization in its own success. For example, regardless of technical advances, the vehicle industry is choking on its own success. Few innovations disrupted nature more than motor vehicles. Meanwhile, back on Wall Street financial analysts churn out old style advisories on earnings in the next few quarters.
There is no bigger risk than thinking that, having defeated nature, we can continue stomping on it.
SR: In your experience, what are the typical risks that companies struggle with in operations?
The biggest risks to us all are external. But operations are artificially roped off and optimized as a closed system. Because of this illusion, operational excellence may also be illusory. However, let’s go along with the gag, and start with operations as perceived by a conventional closed system bias.
Of course, the usual risks are of death or injury coverable by Workers’ Comp and other insurance; most other perceived risks are not-performing as expected. Among operations managers an adage is that recognition is bad. If things go well, you merely did your job. Few people cheer because a train is on time, but if it’s late, they blame you. Furthermore, the public regards many essential workers as second-class citizens doing undesirable work.
For example, next time you are in an airport, watch janitors. Rarely praised, most janitors avoid eye contact unless directly spoken to. If investment bankers do not show for work tomorrow, most of us would not notice, but if 3.5 million janitors do not show up for work tomorrow, everybody would notice. It would make the news.
Furthermore, janitors experience high rates of accidents and occupational illness from chronic exposure to pathogens and harsh chemicals. Few youth aspire to professional cleaning as a career, it’s one of the few job open to ex-convicts. The irony is that a janitor is apt to be the only person in a building with the keys to the whole joint.
Unseen operational risks arise from not sweating the basics and not seeing a big picture from the bottom up. Take janitorial work again. Janitors see what others don’t. The messes and the trash bins do not lie. Indeed, cleaners are positioned to see little things that need attention that everyone else misses. Acting on end-of-shift janitorial reports can avoid bigger trouble later. As Yogi Berra used to say, “Fix it before it happens,” as opposed to “If it ain’t broke, don’t fix it.”
When I “audit” operations, I start with a quick impression of interactions between people; relaxed and open, or tense and guarded. Behavioral poison taints a whole organization, including operations. If behavior is contentious, people have to fix that problem before they can fix other problems – or just hide problems them from each other.
If behavior is “OK” start checking cleanliness, order, trash bins, water leaks, air leaks, and equipment idle for lack of repairs. If maintenance and cleaning is poor, so is everything else. Assuming leadership by top management, begin lean with the workforce in cleaning and maintenance. If the mess fixers understand and support the effort, everything will go better.
The same priorities apply to environmental wastes. Outgoing waste streams tell a lot of tales. Plug any mess you can, big or small, looking for opportunities never seen before. To do this, measure a factory without using money because it deceives. Instead in physical terms, measure all inputs; material, water, energy, everything. Measure the weights of all outputs: product, waste heat, sewage, air. What percentage of the input exits as something wanted and how much exits as waste? That’s “real efficiency.”
Until you are into this, you probably can’t guess a number. Measuring operations by input-output ratios is rare. Accounting never sees these “external costs.” It’s blind to anything not tracked by dollar transactions but risks you don’t see can kill you.
Then ask a deeper question: does the product itself really promote all life, benefit all stakeholders, and enrich us as humans? Or are we doing whatever will earn cash because we need cash to survive in this system?
Think inside-out, from operations outward. If we think outside-in through the money veil, we spot only risks that could wend around culpability loops to eventually puncture company cash flow. Translating risks to money compares them with everything else the business does. This is helpful if you are locked in business think, but it’s in-the-box deceptive. Destroying an ecology, nearby or at a distance, damages nature, even if we never personally see it. Emotional damage to employees, customers, or others is in the same category (and a bone of contention in legal suits). Try as we might, ecological damage does not monetize well.
Perhaps our most dangerous risk, the risk overhanging all other risks, is inability to think outside the money box and see our own actions from other perspectives.
SR: Companies often employ a variety of risk management professionals such as insurance managers, health and safety experts etc.? How does this help and hinder effective risk management?
It’s good to be advised by specialists but learn selectively. The risk is fragmenting risk management with the same silo rifts that disrupt integration elsewhere in a company. Keep it cohesive.
SR: Government and regulatory affairs is a significant risk, including oversight of the environment. What are your views about this area of risk?
Waiting on regulations, so you can conform to them, is like waiting on permission from girls’ mothers before you ask them for dates; always too little, too late. The best companies stay ahead of the curve on safety, quality, HR, and environmental regulations, so they have little problem with them except the tedium of reporting. As for financial, marketing, and trade regulations, adaptive flexibility is key – and staying alert to minimize surprise changes – assuming that the relations are somewhat sane and interpretable. They aren’t always.
Construction laws and permits are typical regulatory thickets. Some are self-contradictory; can’t comply with some without violating others. There’s always the risk of running afoul of some obscure legality or ruling and being cited for something. Live with it; most companies do, and some even have an edge by “guaranteeing” that if they do the design, it will meet all federal, state, and local codes. Where there’s risk, there is sometimes opportunity too.
All that notwithstanding, there has to be a better system than regulations that are obsolete when they are written – by people who don’t really grasp the implications of what they are writing.
SR: Working with financial institutions (e.g., banks) is another area of risk. Any insights you would like to share about this risk category?
By experience, the chief risk is that financial institutions only want to talk with the CFO, and if you are doing something outside the range of what they consider normal by financial ratios, they want to rein you in. I know a few companies that went lean and had trouble with bankers. They found a bank that became interested in lean, taught them kaizen, and shifted all their accounts exclusively to them. Transform finance into a relationship rather than arms-length transactions – if you can.