“There is not a day I don’t think about what Dr. Deming meant to us. Deming is the core of our management.” – Shoichiro Toyoda
According to W. Edwards Deming, the first thing he did when meeting with Japanese business leaders in 1950 was draw a diagram of a business as a system on the board (shown below from Out of the Crisis). It was a simple diagram – almost too simple for many to understand its profound significance. So, what is it about this diagram that literally changed the world and helped some organizations develop competitive advantages that they were able to sustain for many years?
At its most basic level, the objective of the diagram is to show that every business is a system and needs to be managed as such. When most people hear this, they nod their heads in agreement as if it is nothing new. After looking at the way many organizations are run, however, it becomes obvious that the concept is still not well understood.
When viewing a business as a system, it becomes clearer which common business practices actually interfere with long-term success. In fact, the more one learns about systems thinking, the more obvious it becomes that the chance of achieving any level of long-term success without it is very small.
Every System Must Have a Clear Purpose
Every business exists to achieve an aim and uses a series of handoffs, processes, and subsystems to achieve that aim. Sounds simple enough but in many – possibly even most – companies, this is forgotten or never truly appreciated. In far too many organizations, the aim is not clear, not constant, or too heavily focused on monetary gains. Without a clearly stated and unchanging purpose that is focused on value and meaningful to everyone, people will define it on their own, leading to conflicts, waste, and significant losses. Deming went as far as to say that without a purpose, there is no system.
I consider the aim to be comprised of the mission (why the organization exists) and vision (where it is headed). In practice, this means that the organization must stay true to its mission while assuring all targets, objectives, and activities support achieving the vision. In the most advanced lean thinking organizations, this is much more obvious than in other companies.
The Interactions Must be Clear and Continually Improve
In addition to assuring the aim is clear to everyone in the organization, the interactions between each person and team needs to be clear and continually improved. Organizations operate in a highly complex manner and gaining an understanding of the interactions and how they create value for the customer is a difficult but necessary task.
A critical point about systems is that every person in the organization must understand how the work they do contributes to the aim. This means, for example, that a Maintenance Technician understands his or her role is to assure machines are capable of producing parts of the right quality when needed. To do that requires high reliability, fast turnaround for maintenance and repairs, and helping the machinists understand how to perform routine maintenance activities quickly and effectively. Managers have the responsibility to help team members understand their work to this level of detail, including developing an understanding of whom they support in the overall system.
Standards must be established to clarify the work and the interactions and clearly communicate to people what is needed to assure materials and information move through the system to produce value consistently. Whenever the standards are not met, problem-solving must be done to understand why and to make corrections.
Leaders Must Understand the Level of Complexity
Appreciating systems goes beyond understanding the interactions that take place throughout the organization. It includes the understanding that the results of actions are not always simple and easy to determine. For example, forcing the supply chain team to reduce the cost of incoming materials can result in increasing overall costs for the company, even though logic would dictate otherwise.
Organizations are complex, and the larger the organization, the more complex it becomes to understand the effect of a decision or action. Large-scale changes can, and often do, have damaging effects that are difficult to predict beforehand, and are not easy to understand afterwards. All changes must be accompanied by an expectation of the effect on the organization, and results must be continually checked against the expectations to drive learning and help improve understanding of the system.
Fragmented Thinking vs Systems Thinking
The more one develops an understanding of systems thinking, the clearer it becomes that many commonly accepted business practices hamper, rather than help, improved performance. An example is the heavy focus placed on individual performance by most organizations. Systems thinking naturally puts the accountability for performance on the system to a much greater extent than on the individual. Deming used to say that 94% of the problems a company faces come from the system (and are therefore management’s responsibility) and 6% are related to the people in the system. The time and emphasis generally put into a typical performance review system, however, shows that many of us believe the exact opposite. We rate, rank, and hold people across the organization responsible for performance in a system that is most likely flawed. In other words, rather than focus our efforts on improving the system when performance is below expectations, we assume that putting pressure on the individual will improve results, even though the person may have little or no authority to do anything other than try harder, go around the system, or focus on making it look like improvement is occurring whether it actually is.
When traditional performance reviews are combined with the process of setting objectives, the result is often optimization of one team or individual rather than the system or the organization’s overall purpose. For example, a finance team that focuses on improving the closing process by requiring extra work from operations could result in taking time away from producing products or fixing problems and, although the books are closed faster each month, overall performance may suffer.
The typical organization chart is another example that shows the popularity of fragmented thinking. The most commonly used layout for an organization chart shows little more than who has power. Using a chart that is organized by the system (e.g., names and titles on a system diagram), however, would show where people fit in the value stream, as well as the relationships between internal customers and suppliers. It would be much more valuable to helping people understanding jobs and responsibilities than an organization chart that shows who the boss of whom.
These are simple examples that demonstrate the destructive effects of leaders who do not understand how systems work. When the system is not understood and actively managed, priorities are unclear, causing continual conflict between people and teams, and effectively destroying the system.
Managers are Responsible to Create and Improve the System
When leaders come to the realization that creating, managing, and improving the system is their responsibility, the organization will begin to transform. The focus moves to the most important parts of the organization and people start truly working together, rather than against each other, to improve performance.
Although appreciation for a system is only one of the four elements of what Deming referred to as his System of Profound Knowledge, it is something that helps provide context for the others – theory of knowledge, knowledge of variation, and psychology – and the understanding that they must all be present and work together to drive transformation.