Play it Again, Sam

Just the other day, I was reviewing an article from Pharmaceutical Technology on why the pharma industry is having so many issues with quality. One of the root causes identified was training/development of employees and the retention of experienced employees. So, today an article in the Wall Street Journal appears letting us know that the retention of talent at companies is a problem across US businesses.

The article is actually a brief interview with Ram Charan, a widely respected management consultant and former professor from Harvard Business School, Kellogg School of Management and Boston University. Based on the brief excerpt (I hope there was a longer interview that this was a part of), we can glean from Mr. Charan that CEO’s have focused particularly on quarterly profits and the like, and are not focusing on identifying and retaining talent. This is not surprising, as American management has never broken away from their primary focus on numbers. During a recession, then, they will focus even more intently on profits. The outcome, of course, is that steps are taken which increase the short term numbers, but fail miserably at assuring long term growth. As Deming was fond of saying, anyone can increase short term profits. Mr. Charan is concerned that as the economy recovers, good employees will be easily drawn off to other companies, as their talent goes unrecognized by their former employers.

I wanted to draw attention to one particular element that I think reflects an enormous problem in American business. Mr. Charan cautions, “The biggest risk is top management not knowing explicitly whom they depend on lower in the organization for success.” It has amazed me for years to what extent senior management in companies have no idea who does what, and who really contributes to the success of the company. Every major layoff that I’ve been around (and I’ve survived many) forces the loss of huge numbers of very valuable employees, and leaves an equally large number of people who have no idea what they are doing behind. The end result is either contract arrangements with the former employees, usually at great expense, or a slow return in numbers of employees as the company has to hire as the only solution to getting the job done.

One can only hope businesses will start listening to Mr. Charan. He says he works 365 days a year, so he’s clearly talking to a lot of them. Training and development of talent is a key element of the Deming philosophy, and thus we must understand it to be key to the transformation of American business.

A Question of Causality

The latest issue of Pharmaceutical Technology features a letter from the editor regarding various quality issues which have plagued the industry over the past year (really the past couple of years). The latest of these came to light after this letter was published – further evidence that whatever is causing these problems seems to be continuing unabated. So, then, what is the cause, or rather, what are the causes?

Ms. Hoffman has asserts that one of the causes, if not the cause, of this apparent crisis is that companies have significantly reduced the numbers of quality personnel employed. This reduction in quality force, is supported by the annual employment survey that they publish. Ms Hoffman’s conclusion is certainly reasonable. We have a significant quality problem in the industry, coupled with a significant reduction in the number of people whose job is quality. In fact, the causal relationship may be valid (I would note that the systematic problems referred to date back before this years employment changes, and in every case reflect problems that were a long time in developing). However, I would propose that its not. I would propose that the reduction in force reflects one of the underlying causes, a cause that is so significant that fixing it represents a major challenge. This is not, I think, the only cause. There is another cause that Ms. Hoffman addressed earlier in the year. I will address these first two causes here. There is, though, one significant cause, that I never hear anyone address. In many ways, it is reminiscent of the Emperor and his new clothes. It is a problem I’ve seen since I first set foot in a quality department over 20 years ago. I will briefly discuss this at the end, but I think it merits an entire blog entry to itself.

Let me briefly discuss one cause that Ms. Hoffman brought up last August, the subject of training. When you have several industry veterans describing the state of training in modern pharma and biotech companies using terms like “abysmal”, and “woefully inadequate”, the situation is dire. There has been a long standing myth in the pharma industry that an ideally written procedure would obviate the need for much training. Following that myth, you would then believe that simply handing the procedure to any random person off the street would enable them to successfully complete their required tasks. However, in practice we know that this doesn’t work. All procedures assume some base level of knowledge. The greater that base, the less detailed the procedure needs to be in order to be effective. Part of this phenomenon is that there are invariably aspects to executing the procedure that will help things go more efficiently, or reduce the amount of difficulties one might encounter down the line – but that shouldn’t be part of the written practice because they are truly optional, or too difficult to describe. This is a complicated way to describe what is best termed as wisdom. The simple collection of insights one develops with experience. So, as is pointed out, the loss of training dollars is bad, but worse is the loss of the experienced “mentors” that could impart the wisdom of experience.

This latter point, the loss of experienced personnel is related to one of the seven deadly diseases of Deming. Although Deming was specifically focused on top management, the loss of experienced people further down in the organization causes not only a break in leadership, but a loss of the accumulated wisdom that is important to any organization. In addition to the deadly disease associated with the loss of experienced personnel (and there is one deadly disease we haven’t touched on yet), this whole attitude toward both training and on the job training violates the 14 principles that Deming felt was so important to the transformation of business.

The training issue, while bad all by itself, reflects a cost cutting mindset that is also leading to the loss of quality personnel (and personnel in other areas). Management in the pharmaceutical industry has become focused almost entirely on short term profits and management by the accounting department. History has shown that such a mindset does not end well for the company that engages in it. This is true whether business makes human medicines, or toy cars. of course, as Ms. Hoffman points out, the consequences for the public are not as deadly in the case of toy cars, but the consequences to the business are similar. Of course, it is interesting to note the somewhat lopsided loss of quality personnel during this current round of corporate purges that seem to be going on. I have to wonder a bit as the cause. Is it entirely that quality costs money? To some degree that is likely the case. Its sad that such a mindset persists to this day. Shortly after the first GMP class I ever attended started, we were told that management in all companies look upon quality as a cost center. I had hoped we would have moved on from their, but obviously we haven’t. I also wonder, however, if the disproportionate laying off of quality personnel reflects a lack of satisfaction on the part of management with their quality groups. As I noted above, many of the problems that companies have been experiencing have roots long before this recent round of downsizings and reorganizations.

Clearly, the one problem that exists is that senior management has generally still not signed on to the belief that they must be the champions and leaders of quality. However, that is not the entire problem with quality in our industry. This leads me to two topics that I will address in subsequent blog entries. The first is a sense, promulgated by our government, that compliance with regulations assures some measure of quality. While it is heretical of me to suggest this, I think all but the most basic of regulations probably serve to interfere with quality. The second is a fundamental question about the skill set of those who engage in quality within the pharmaceutical industry. In general, are the skills of those engaged in quality the skills necessary to improve quality? This, too, I will address in a later entry.

Can Caterpillar Become a Butterfly?

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.

Looking Outside

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.