In a recent Wall Street Journal article, Caterpillar discussed some changes it is pursuing in the interest of transforming itself into a more significant global player. Clearly, when an organization is interested in transformation, a name that should come to mind is W. Edwards Deming. His goal was to teach businesses how to transform themselves by implementing quality principles.
This blog will serve as a place for me to blog about Quality in a general way. Since my primary area of interest is Pharmaceutics, I imagine going forward that is what you’ll see most often. However, every once in a while I hope to do a high level analysis of what companies, even those that are not engaged in Pharmaceutics, are doing and how their actions compare to Deming’s 14 principles (and the 7 Deadly Diseases). Sometimes, as in this case, it will be to muse on what the likely outcome of a transformation exercise will be. In others it will be to use this comparison to explain the current state of the organization.
Principles 11 and 12, and the 2nd, 3rd, and 5th Deadly Diseases
The reason this article caught my eye, was the title of how a lightning bolt, or sudden gestalt, had led Caterpillar to look outside the company for solutions. I was curious about a great deal when I saw this, but then great disappointment followed immediately upon reading the caption under the picture of David Bozeman, the VP of Integrated Manufacturing Operations. The statement is telling, “he wants his factory managers to worry about cash flow, not just manufacturing, so they also focus on the company’s financial success.” Now, I don’t know what is meant by focusing on manufacturing, but I can bet it refers to output. That is a chronic disease among manufacturing organizations. A disease that some have asserted ( I suspect correctly), led to Toyota’s tragedy just a few years ago. So, it’s good that Mr. Bozeman wants to change that focus. Unfortunately, he doesn’t really understand what’s wrong with the previous focus, so its not surprising that he incorrectly identifies what the new focus should be. In fact, for all intents and purpose, the new focus is the same as the old focus.
The focus on manufacturing output, that had previously been Caterpillar’s main focus, fails to meet two of Deming’s 14 points (at least), and exemplifies at least one of the seven deadly diseases. Deming repeatedly points out that focusing on quotas and standards of output is incorrect, and that leadership should be substituted instead. The point, the foundational principle, is that a nearly single minded devotion to quality, to continuous improvement, on the part of everyone in an organization, will get you high productivity and lower costs. Focusing on output will, sooner or later, result in corners being cut. Several times in Out of the Crisis, we have samples of interviews with people working within such environments. The common thread is that they let quality slide as far as possible to make the numbers.
This leads to the issue of needing to keep in mind the unknowable numbers when managing. The key unknowable number is the impact of customer satisfaction on future sales. I can create a wonderful system of producing good, maybe allowing for 1 warranty call (replacement or repair) for every 10 items produced. I bake that into my numbers, and set the price accordingly. I may even have some market researchers who have determined that people won’t mind so much if they have to take the item in question in for repair that frequently. What I can never know is whether that customer will inclined to buy from me again. Will he tell his friends to buy from me? This latter number is really the difficult, yet the most important. If I make a quality product at a good price, and every customer recommends it to 10 others, my sales will expand more than I can anticipate. Similarly, if that customer gives out a lukewarm, or worse, a bad recommendation, I could end up losing sales, and never understand why.
So, when Caterpillar focuses on how many units its producing, it fails to focus on quality, and which probably results in negative pressure on sales growth. By not worrying so much about cost to produce, they negatively impacted profits (see the graphic in the article).
So, Mr. Bozeman’s strategy is to focus now on cost containment (more euphemistically stated as cash flow awareness), under what are likely several assumptions:
a) Product quality is high and growth will continue to be robust.
b) The only way, then, to increase profits is to reduce expenses via “Cash flow awareness.”
c) Cash flow awareness will have no negative impact on quality.
The first assumption may have some validity, as certain Caterpillar products rank highest in customer satisfaction. However, such a measure is inherently relative, and companies that focus on being merely better than the next guy, will ultimately fail in that effort. The second assumption implies that the supply chain cannot be brought under control by any other means than by focusing on price tag of raw materials. That, of course, is invalid just on an historical basis, as Deming’s experience was that focus on supplier quality meant lower cost and higher quality over time. Finally, it is hard to imagine that increasing “cash flow awareness” will not result in having profit margins become a measure of management success. Whenever that has been tried, poor quality ends up being the result.
Of course, the main point of the article is that Caterpillar is increasingly looking outside of Caterpillar for management talent. The assumption being that in order to have access to all of the best management ideas out there, you need to cast the net wider when hiring. Of course, they seem to miss the notion that you can acquire access to outside ideas without hiring outside. That can be done in a variety of ways. Their approach, however, tends to promote the sort of management hopping that Deming found so contrary to high quality. The classical Japanese model was to seek to have management grow up within the organization, so that they understand the unique challenges of that organization. They can then apply principles from wherever it seems best. By seeking to grow and develop internal talent, everyone maintains a stake in the long term success of the company.
Caterpillar is an avowed proponent of Six Sigma, but its hard to accept that the underlying philosophy has truly been embraced by management when we see signs of the seven deadly diseases. It is not uncommon for companies to adopt Six Sigma methodologies for process improvement and troubleshooting, without ever making quality the foremost operating principle of the company. These Six Sigma efforts live for a few years, but ultimately fade away in the push for sales and profits. It appears that this is what we are seeing now. Management, realizing a push to acquire talent from the outside, will know that they need to deliver on short term profits or look for better jobs elsewhere, in order to succeed. This not only doesn’t guarantee the long-term success of the organization, but it will likely prevent it.
I imagine that we will see several years of growth in both sales and profits for Caterpillar. However, after that, we will start to see the decline. If the decline is noticed in time, and the right decisions made, it is possible that the company can then finally be put on the right path. Unfortunately, I doubt that this is what we’ll see. More likely, as the unknowable numbers come into play, we will see an apparently inexplicable falling off of sales, as some competitor will begin to intrude in Caterpillar’s space. Caterpillar may then, like most companies, pursue draconian cuts in order to reduce costs further, in the interest of shoring up sagging net numbers. Of course, as has been played out so many times in US industry, that will only result in a one year or so slowing of the fall.