Adam Smith’s Mistake and Me (Part 2)

1.  Summary

I wrote Part 1 of this paper a couple months ago and I fully expected to be able to finish this part in a few weeks.  But I couldn’t do it.  I had not fully completed the detail of the main theme of this paper and that was a precise statement of the mistake that Adam Smith had made.  And it took some time to get that clearly in my mind before finishing this paper.  And it boiled down to a simple observation that we all see clearly today in our current political theatre.  And that is the difference between the two major parties.  They reflect two different versions of our capitalist, economic system.  And these differences play out as demonstrations of Adam Smith’s mistake.  His mistake was failing to see that transactions in a free enterprise capitalist system played more strongly into human nature than he had thought.  Of course, he noted that Self Interest was constrained by the Protective hand of competition guiding any economic transaction.  And so, I would like to explain in more detail where Adam Smith erred by not taking this idea further.

2. Some More Background

In Part 1, I mentioned a little bit about the main driving force of Adam Smith’s Economic System of Self Interest.  As Joan Robinson, a post-Keynesian economist, laid it down succinctly, “This is an ideology to end ideologies for it has abolished the moral problem.  It is only necessary  for the individual to act egotistically for the good of all to be attained.” And as Lux puts it, “And there we have the essence of Adam Smith’s Mistake.”

As Lux further points out, history has shown that Self Interest alone is not sufficient to achieve the good of all.  The “invisible hand” of competition was not sufficient.  So there must be another principle or principles at play to moderate Self Interest to achieve a common good.  Smith mentioned the honesty of the merchant as one such moderator. Others that come to mind are: fairness, integrity, reasonableness and, of course, a sense of justice.  These modifiers all play together to provide some control of self interest.  One could call this a system of morality.  I call it “a conscience.”

3. The Conscience of Capitalism

 When I originally linked Conscience to Capitalism, it was from a discussion with my wife.  We were discussing the current political situation in Washington and she had the opinion that one party had a conscience and the other didn’t.  In her view, the conscience was manifested by one political party in their push for Social Programs.  It was my wife’s position that all of the major social programs: medicare, social security, and affordable care act were all advocated by the party with a conscience (PWC).  And these programs are continually under attack by the Party without a Conscience (PWOC).  

To be fair, it must be remembered that there is reason to be suspicious of all social programs because a number of proposed Social Programs have fallen flat over the years: for example Lyndon Johnson’s Great Society whose main goal was the total elimination of poverty and racial injustice.  But out of that Program, he did get Medicare right and some new major spending programs that addressed education, medical care, urban problems, rural poverty, and transportation.  These were launched during this period.  Some worked while others didn’t.  It was spending, harped on by  the PWOC, that did not contribute to economic output, the bane of the PWOC.  Training to create the work force needed for new technologies and production environments was a waste and more than likely zero return to the average American.  The arguments raged on.  

When the PWOC came back into power they defunded many of those programs or reshaped them to reflect their view of how restructuring should be done.  A more recent example is the Affordable Care Act where the PWOC’s most recent President wanted to eliminate it but ran smack into Federal Judge’s, including those he appointed to the Supreme Court, who rejected their logic and tabled most of their objections.

One area where the PWOC shines is in giving tax breaks to the rich.  Go figure?   

For instance, the Tax Cuts and Jobs Act of 2017 made several significant changes to the individual income tax, including reforms to itemized deductions and the alternative minimum tax, an expanded standard deduction and child tax credit, and lower marginal tax rates across brackets.  The 2017 tax law cuts the corporate tax rate from 35 to 21 percent and shifts toward a territorial tax system, in which multinational corporations’ foreign profits largely no longer face U.S. tax. These tax cuts overwhelmingly benefit wealthy shareholders and highly paid executives.  The only argument from me is that the wealthy pay a fair share compared to the $60,000 wage earner.  They cannot walk away from the tax season with no obligation to the United States.  From my perspective these tax benefits to the rich were truly unconscionable.  I can live with the ups and downs of the parties playing games with tax structure, but no matter how you slice it over time, with the mammoth tax credits that the rich make use of, these tax benefits merely lead to the rich getting richer over time. 

This last week, President Biden urged Congress to pass federal voting rights legislation, calling the issue “a test of our time” in a major speech in Pennsylvania.  His speech comes as some GOP-controlled legislatures have moved ahead with new state laws restricting ballot access, all coming after Senate Republicans blocked a sweeping voting and election bill last month.  These moves by the PWOC fall into the category of unconscionable attacks on the basic right to vote with their efforts focused on people of color by adding layer after layer of conditions to vote.  

The reason for this activity was noted by the previous president when he said, if everyone could vote, the PWOC would never get anyone elected.  Hence the effort to create barriers to vote for these people of color who are primarily voting with the PWC.  America is a democracy and the right to vote is our most sacred right.  And the PWOC is truly showing its lack of a conscience by doing everything in its power to disenfranchise the people of color who have been suppressed for so long.  Again I am appalled by the PWOC.

But they go further.

On January 6, 2021, the sitting President stood on a podium in front of the White House and directed the mob in front of him to storm the Congressional session that would officially certify that Joe Biden had won the election.  His followers stormed the capital and their efforts were rightly noted and captured on live TV.  The President who incited these riots then has the audacity to say that he didn’t want them to do that.  Duh!!!  And then, congressional players showed their amazing lack of a clear conscience by downplaying the events and even arguing that the sitting President didn’t really have anything to do with the end result.  

One congressman who was seen manning a blockade to keep the mob out of the hearings was later heard to say, to an amazed America that this was really nothing other than a loud congressional tour.  

Their rhetoric on the floor while the attack had just subsided was truly strange and demonstrated excessive lack of a conscience by doing everything in their power to keep a duly elected candidate from getting the electoral approval that was rightfully earned.  It was truly one of the most despicable demonstrations of the violence incited by a sitting president to protect his failure in the election.  And demonstrated his hubris as he cried that the election was stolen from him.  All of this activity has torn at my heart as an American. And you have to ask, where is the Conscience of a Conservative?

So adding a conscience to our capitalist system in deference to Adam Smith’s guiding hand, we have a way to describe the fundamental principles that guide  participation in our economic system.  With a modest conscience, the PWOC could be acceptable but I don’t see it.

I recently heard one of the PWOC Senators calling a PWC senator a Socialist.  The issue wasn’t Socialism but rather the PWC senator advocating a social program.  In this particular case, he was advocating a program for the Social condition of the one of the weakest in our society.  Advocating Social programs does not make one a Socialist.  It merely shows empathy and a conscience.  Perhaps the noted PWOC Senators might read a little Marx, Engel or Eugene Debs  to get squared away about Socialism.  Trust me it isn’t about Social Programs. 

There are two issues playing here: politics and the economy.  Obviously, Adam Smith is primarily addressing the economic philosophy that he described in his tome: The Wealth of Nations.  But the two political parties are a direct reflection of either version of Adam Smith’s economic propositions: with or without the Guiding Hand of a conscience.  

There is a major subtext that is appropriate to mention here. In economics, production is composed of 3 parts: resources, capital and tools, and labor. In this context they are all subordinate to production. Two of the 3 components of production are things whereas labor is people.  In this concept of production, labor (people) are put on the same level as things and so become “things” in any analysis of production.  Apart from the concept of self interest, this is the most dehumanizing concept of capitalism.  That alone gives reason to have a social concern (the conscience) as a moderator of the harshness of unrestrained capitalism which treats labor as things and not humans. 

4. Conclusion

I have put forth an idea that has percolated in my head for over 20 years and it came down to the recognition that there was something fundamentally wrong with PWOC calling PWC Socialists every time they disagreed.  In looking into it, the disagreements were almost always over social programs.  Democrats are not Socialists and Republicans are no longer conservative but they comprise our two party system: Capitalists without a conscience and Capitalists with a conscience.

I have many Republican friends. When they read this they will hit the roof.  As individuals, they may have a conscience that they rationally apply to management or decision making in their realm of influence. But my point is that if they are offended, think about it. The headquarters folks of the party in Washington, D.C. are showing the world that they don’t have a conscience.  If so, why follow? 

Adam Smith wrote one of the most scholarly treatises on capitalism.  In fact, he defined it.  And it has stood the test of time. But unrestrained capitalism is harsh.  It needs not only the Guiding Hand that Adam Smith introduced but as he noted himself, the butcher and baker have to deal with their customers in an honest manner.  In other words, they shouldn’t cheat.  But we noted that the system needed a more sweeping reach to create a moral system on top of his original thesis.  From my perspective, that moral system was the “Conscience.”  Politics and economics are strange bedfellows but they share the same mattress with sometimes frightening progeny.  But with the few issues noted in this brief article, Adam Smith’s mistake without the Guiding Hand exposes the harshness of capitalism without constraint.  Hence, I have added a conscience as not just sufficient but necessary to meet the challenge of capitalism. 

Enjoy. 

Len Bertain

Tribal Knowledge and the 5/67 Rule

The 5/67 Rule is a subset of the 20/80 Rule or 80/20 Rule.  We discovered it during our War on Waste.  We were always in a hurry to get projects completed and we didn’t have time to look at 20% of the problem.  But we did have time to look at 5% of the problem.  And when we did that we kept seeing that we were getting about 60 to 70% of the targeted benefit.  We called it the 5/67 Rule without really knowing much about it.  It just seemed to work but it didn’t make sense until we stepped back and looked at what was happening.

It turns out that what we were seeing was effectively the 20/80 Rule operating on the 20/80 Rule.  If you take 20% of 20%, you get 4%.  And if you take 80% of 80%, you get 64%.  And the 4% and the 64% were close enough to 5% and 67% and that is how we got there.  If you look at thee curve, the 5/67 is just below the 20/80 position.  But it is a steeper part of the curve.  That means that there is a lot of leeway to identify a 5/67 situation.   In other words, 3% of the effort might give 80% of the benefit or 10% might give 50% of the benefit.  Whatever, you have great leverage here and that is a key part of 5/67 Thinking.

We think that 5/67 thinking is the way that you should run a business.  For instance, when you develop a new product, deliver 5% of the features and you will get 67% of the benefit and then you can add other features over time.   The rationale here is that 5% of the features gets you to market quickly.  The 5% of the features can serve as the foundation for building an aggressive product expansion plan.  Another good example of the 5/67 Rule is seen in the healthcare field:  5% of employees account for 67% of a company’s healthcare costs.  When you use 5/67 thinking in how you introduce products, it gives you a jump on the competition and you have your progressive plan of features available to quickly introduce new versions of the product.

My theory on new products is that you want to get the product off the shelf quickly and immediately begin generating profits.  The problem with most developments of new products is that the engineer is never satisfied until s/he has delivered the 100% solution.  That is folly and is very expensive.  Get the product to the market, use the profits to pay for expansion and improvements and be recognized as an intelligent source of great innovation.

Managers and executives that I have worked with need about 2 seconds to understand why there is a problem letting engineers work to get the “100% Solution.”  My point is that it will take forever and cost a fortune.  So I advise CEOs to get the product out the door and see if anyone actually likes it or wants it.  Introduce the product with 5% of the features that you need and you will get 67% of the benefit that you are looking for.  Once on the market, new features can be added.  Of course, you need to anticipate as many of those future features as you can to minimize the costs of upgrades, but if you start generating revenue you can start adding staff to move to a more complete offering.  There are many others more knowledgeable about how to do this but trust me, if you adopt a “5/67 Design Mentality,” you will be very successful and profitable.

In fact, I have a theory based upon this principle.  It is the Bertain Theory of why electronic tradeshows exist.  If you didn’t have a trade show to give an engineer a target for product completion, it would never get done.   The theory goes something like this.  Engineers are trained in school that in order to get an A, they had to get their homework done each week on time.  That is drummed into them for 4 years.  So when you tell an engineer that you need a product done in time for a particular trade show, it will usually get done.  Maybe at the last minute, but it will get done.  I was at an electronics trade show in Las Vegas one year and I asked all the CEOs that I could meet whether their new product would have ever gotten done without the trade show as an end game.  They universally laughed when I told them my theory and they all agreed.  And all of this is based upon the 5/67 Rule.

This is all part of our thinking about how to improve Tribal Knowledge in a company.  Most of this discussion is reviewed in my book entitled: Tribal Knowledge Innovation Encyclopedia: Terms, Phrases and Concepts.  The book is available on Amazon.com.

Best,

Len Bertain

Adam Smith’s Mistake and Me

No Blame is a registered Trademark of Leonard Bertain, 1993 – 2020.

By Leonard Bertain, Ph.D.

1.  Summary

I  have been teaching client employees to solve problems over the last 35 years.  Mind you, over those years, I helped client companies address over 10,000 ideas and helped them generate over $2 Billion of first year profits from their solutions.  But I have continually asked myself, why only about 20% of my clients were able to sustain their effort of continually solving problems.  Employees worked hard in the interest of their companies to generate those results.  In fact, I delivered a TEDx talk on the subject of the question, “Why did I get the high ROI (one year profit contribution/cost of the solution) results that I did?”  And I thought I gave a pretty good argument about that.  But the question that I want to address here is: why couldn’t I get 100% of my clients to sustain the effort because the CEOs saw the high ROI solutions that I helped their employees achieve.  

2. Adam Smith’s Mistake

I was down in my basement the other day and was looking through a bookshelf of some of my old business books that I had read at one time or another.  I picked up a book that I had read 27 years ago entitled: Adam Smith’’s Mistake: How a Moral Philosopher Invented Economics and Ended Morality by Ken Lux.  I was fond of the book as it reviews the details of Adam Smith’s book The Wealth of Nations which I had read in college.  Lux spends a good deal of the book explaining the meaning of a few key concepts that Adam Smith developed and his thesis guided me to another idea that I want to share.  

One of these concepts was “Self Interest” which was a key observation that Smith made about why the “Butcher and the Baker” help put food on your table.  They don’t do so because they like to make bread or cut up animals for you to buy.  Instead, they do it because it is in their self-interest to do so. They make money selling both the bread and the meat cuts to sell you.  And then he discusses why the butcher or baker don’t cheat you in their sales transaction.  There is nothing that requires them to be honest or fair or just or benevolent.  So Adam Smith introduces his “magic hand” that looks over that transaction to insure that it is somehow an “honest” transaction.  I don’t want to reconstruct Smith’s and Lux’s arguments here because Lux does a better job.  

I wanted to discuss the logic behind Lux’s rationale to “Adam Smith’s Mistake” because that sets up the main theme of this paper.  I am going to get into the foundation for a new Economic Theory for managing American businesses.

Before I do so I would like to provide some insight as to why I feel that there is grounds for a discussion of this issue.  I believe that it could be the basis of a rational approach to substantial and continuous profit making using the main untapped asset of any company: their people.

3.  Some Background

As I noted earlier, I had some very good success with my approach to business improvement.  I  used a variation of the Toyota Production System (TPS) as a problem solving foundation.  The key part of that system is recognizing that non-value-added activities keep companies from making money.  In the words of Henry Ford, “Anything that is not value-added is waste.”  Waste or muda (Japanese) is  key to understanding TPS Problem Solving.  For example, moving things doesn’t add value (unless moving is a value-added function for your business – like FedEx), storing things doesn’t add value or; fixing bugs in software doesn’t add value.  We had about 12 different categories of Waste to guide the problem solvers.  So the first 2 steps of our problem solving process were identifying a waste and then finding its root cause.  Finding the root cause was always fun because that exercise often alerted the problem solving team that they were working on a symptom and not the root cause.

One of the concepts of the concepts of TPS was the idea of Kaizen or continuous improvement.  This was an idea based upon the Zen principle of the search for perfection in our lives.  When I started up my program 35 years ago, I got so much push back from CEOs with that idea that I eased off.  Their common retort was: “who cares if we are getting better, are we making money?”  So I used a fast and high Return on Investment  (ROI) as a way to get the CEO and his Management Team’s  buy in.  If you could keep the ROI high, management stayed excited for a while.  But my question about that was, “why couldn’t American managers stay excited about giving their employees an opportunity to keep solving problems with a high ROI?”  That’s what we are going to try to answer.  

To help teams get through these first two steps, we trademarked No Blame so that they could get past the guardians of change that every company has.  And boy can they be mean.  Hence, the need for No Blame.  Change without reprisal.

 .

So we progressed through the rest of the Problem Solving approach.  The next step guided through the analysis of how big the waste really was in terms of annual cost to the company.  We started with a goal of 20 to 1 ($100,000 of waste with a solution cost of less than $5,000) for our first projects.  We then upped the ante by trying to achieve solutions with a 50 to 1 ROI.  Today we target 100 to 1 for our larger clients.  Any one of these objectives is pretty good and we have not really had much time linking a $100,000 problem to a $2,000 solution.  In the Fortune 2000 companies, the problems really are plentiful at 100 to 1.  Believe me, you try this and you will be a believer.

So, we go through 4 more steps after the first 2: sizing the waste, costing its solution, presenting the idea to management and, finally, implementing and measuring the results over a year.

I have to admit that I was less than thorough in my measurement of the annual benefit over the next year after implementation.  We initially estimated the size of the problem using less than precise analysis.  And we told the accountants to chill out during the proposal stage.  But afterward, after we had implemented the solution, we needed the accountants to help.  After the initial pushback from the accounting folks, the people implementing the idea just backed off and agreed that they were seeing the proposed benefits and nobody complained.

But we have since developed an on-line tracking tool that we sell to the CEO before we get started.  And we do all of our Problem Solving on-line using Zoom and other tools to manage our projects.  But now, the CEOs want to see the ROI in detail and so the Accountants have to get on board.  It takes a couple of months of data collection to get the numbers needed for the hard proof.  Once the first month’s data is collected it becomes routine after that and the Problem Solving team can manage the data input process.  As it should be.  

So you ask yourself, why wouldn’t a company keep doing this if they could keep getting ideas implemented with a 100 to 1 ROI?.

And that is what brings me back to Adam Smith’s MIstake.

4. Adam Smith’s Mistake

The thesis of Adam Smith’s Mistake is that Adam Smith made a mistake when the concept of Self Interest was originally suggested.  He had stated his thesis as this: “…we address ourselves not to their humanity but to their self-love.”  to Smith, Self-Interest was not a bad thing.  It was a good thing, a benefit to society.  Self-interest trumped (sic!) benevolence.  And this was a shock to all the economic actors at the time.

And it took hold as a founding principle of Capitalist Economics that currently drives our economy.

Smith provides a simple argument why benevolence is not the primary driving factor of any economic system.  If it was the butcher and the baker would give away their goods and the beneficiary would be the beggar who had no means to pay.  So right away, Smith makes his point that self-interest is the primary driving force of the economy.  Furthermore, honesty has no role in Smith’s economic world.  There is nothing that prohibits someone from cheating a client.  Just don’t get caught.  “Honesty is the best policy” is not an economic doctrine.  He firmly believed that self interest was the sole principle for achieving the public good with the saving grace being the Invisible Hand of competition.  Competition would keep the “expensive vanities of the merchants, dealers and landlords in check.”  He would hardly have been surprised by Rockefeller’s motives but he certainly would have marvelled at his success.

So Lux squares away Smith’s thesis by adding the word “only” as follows:  “It is not only from the benevolence of the butcher, the brewers, or the baker that we expect our dinner, but from their regard to their own interest.”

5.  A Modest Proposal

My problem still remains.  Why didn’t all of the CEOs opt to go forward with the High ROI Problem Solving program.  So I turned to Adam Smith as he has such an influence on how our market Economy functions.  So I looked at American Capitalism and asked myself, when has any corporation acted with self-interest and benevolence, as a ruling principle.  There are always exceptions to this but as a rule, Self-Interest stands alone.  But I was interested in Adam Smith’s thinking as it relates to my Problem Solving concept.

Could I somehow link my problem with client CEOs, the lack of on-going Problem Solving activity, and  the Self-Interest philosophy of Economics.  If I could, I would be able to understand why my successful High ROI Problem Solving Program did not continue long after we discontinued our engagement.

So here is what I concluded.

Adam Smith was clear that Self Interest guided market transactions.  Ken Lux argued that it was not only Self Interest that guided that transaction but required a guiding hand in the form of a benevolence consideration.  We know that most CEOs follow the market and make decisions with the subtle understanding that they are guiding their decision with Self-Interest.

I made all of my clients lots of money with High Roi Problem Solving.  So why didn’t 80% of these CEOs continue doing the Problem Solving?

My thesis is this.  The concept of Self-Interest is so indoctrinated into the national mindset of our free market system such that all CEOs, small or large businesses, are brainwashed into that idea.  So current CEOs, regardless of where trained, all buy into the Self-Interest Doctrine.

But is that alone enough for them to reject on-going, High ROI Problem Solving Ideas.  

I often wondered if my pushy presence to get ideas thought out and implemented might be an issue.  When asked about this, some of the CEOs said that I was a lot of work to deal with.  When I walked in the door of the company, I pushed to get things done.  And I was relentless because I had a clear responsibility to help get ideas in play implemented.  So maybe I was the problem.  But most of the CEO clients said that maybe the process was flawed in some way.

So I looked at that.

One of the main issues noted by the smaller clients was that I was all over their facilities listening and helping to implement improvement ideas that were suggested.  It revolved around me too much. (I will explore in Part 2 what we found out was the real reason for my dilemma.)

(END OF PART 1 OF 2)  Second part to be published next week.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            ,..  .

Open Systems Antithesis Theory

 

George Sibbald is a consulting friend and he is the one who coined this term.

Organization Development (OD) people have evolved a special language to describe what happens when companies change. So I have adopted their language to describe what we do. We solve problems but as a side bar, we change companies, we think for the better.

In the language of the OD folks, an open system is a system that affects and is affected by its environment.  A closed system is therefore a system completely isolated from its environment.  And as we all know, all living systems, including collections of people, like businesses, are living systems and therefore open systems,

Our approach to problem solving has proven to be a very successful way to change these open systems that we call companies. Craig Humphreys and I wrote a  book “5/67 Problem Solving: How to solve Wicked Problems…correctly” describes how our incremental approach to problem solving with a focus on High ROI solutions alters the way companies work. It focuses employees to step away from the business (figuratively) to learn a new way to think about problems. By doing so, something magical happens, our client companies change.

I am not trashing the OD folks, but I am challenging them to rethink their process of how you drive change in a company. Their approach to change has traditionally been to change the company by changing individuals using the techniques of individual or group intervention. Their thesis is that in order to change an open system that you should change the individuals. They advocate that when a problem occurs with personnel, it is expected that the way to deal with the problem is to deal with the employees and their problem directly. That would be the “expected thesis” to use if you tried to deliver change operating under that premise.

On the other hand, we have a different approach. It is the “antithesis” of the intervention approach. My long term business friend, George Sibbald, pointed this concept out to me years ago.  He had talked with a psychiatrist who said that he never changed individuals with his interventions on the individual but he worked the people who comprised his surroundings or personal network of friends.  He got this person’s support network to treat the “sick” person using a revised set of norms.  When he did that he made progress. He removed the person from the environment, changed it to the new way of dealing with the patient and then introducing the sick person back into this new paradigm.  And it worked most of the time.

This is where the Anti-thesis occurs.  We have recognized that if we want to change an organization, we need to change the environment like George’s psychiatrist friend.  You create the right environment to get the result that you want in the employees.  In this theory, the antithesis is “you don’t change the people, you change the environment.”  Create the right environment and the right work will follow.  And the right attitude.

This is how the Culture of Innovation or Problem Solving Culture is developed.  You don’t worry about the attitudes of workers because when they are solving problems and improving the business they usually get the right attitude.  If not, their peers will point out that the “problem solving” environment is a lot more fun than that other environment that they had to live with.  And further, their peers might tell these people if they don’t get on board then maybe there is better place for them to work.  We have seen this quite a few times because the people who like the new environment are passionate about it.

This environment allows employees to earn respect from both managers and executives.  And when employees get respect from their managers they give it back.  This is the best of all situations because the environment creates what we call “Earned Respect.”  It creeps into the organization with a 2 way version of respect: respect from managers down to employees and the corresponding respect back up the chain of command.  We learned this from a Union Executive who claimed that unions would not exist if there was a “Mutual Respect” from managers to employees.  This is what we call “Earned Respect” because both sides have earned it: the employees for delivering high ROI Solutions to the company and managers and executives for recognizing employee contributions.  It is actually that simple but is crucial to changing the corporate environment.

That is why we teach employees and managers to Solve Problems with a focus on what we call “5/67 Thinking.”  You focus on the 5% of the solution that gives 67% of the benefit.  And because you teach employees to generate high ROI solutions when they make these improvements this is looked upon favorably by management.  Managers learn to give their employees an opportunity to fix problems that have been bothering them or maybe the employees can address a problem that is bothering a member of the management team.

Tom Peters had a number of good ideas.  But he once said, “if an employee is pissed off about something at work, it is a problem.”  And is probably a great inefficiency or waste in the business.  In fact, when I have a group of employees that have been directed to find a problem and solve it and they are stuck with no ideas to work on.  I would ask them, “does anything piss you off about your work when you get here every day?”  It takes about 2 seconds for all the hands to rise.  And they are then ready to go.  This is an amazing process to watch.  I have a number of stories to tell about this and they are almost funny if not for the seriousness of the people involved.  I almost wait for that moment because it gets me going and the teams really get engaged.  You might look at this video on YouTube: Earned Respect and Tribal Knowledge.

The key here is giving employees the tools that help them solve these bothersome problems. But solving problems alone is not enough, they need to learn to think in terms of High ROI solutions. The reason that you do this is that it immediately gets the support of the Champion of the Idea or the Executive Team. A high ROI project will lead to more profits and that is going to make everyone happy.

We have some tools to address this but that is not important.   That is my sales pitch.  This post is about creating change in an organization.  What is important in doing that is that you, as an executive, must train and support your organization to be “High ROI Problem Solvers.” If you do so, your have changed the organization using the principles of the Open Systems Antithesis theory. You didn’t change the individuals, you changed the environment by giving employees opportunities to solve problems which leads to the earned respect that is the foundation of this new culture.  Call it what you want but we like “Problem Solving Culture.”

 

The 95/33 Solution

In a previous article, we described the “Common Core” solution in a remanufacturing plant.

The main line business addressed the most frequently used cores, what we called “the common cores.”  But there was another business opportunity that we discovered that had not been tapped.  It amounted to creating an entirely new business to deal with the old car restoration market.  This was a national opportunity and proved to be very profitable.

Here’s how that worked.

The primary business, the remanufacturing the 5% of the products that created 67% of the demand, was a typical inventory management problem.  And the owner managed this very well.  Raw material was consumed and replacement parts were ordered to replace it.  However, when we tried to look at the vast number of cores that made up the remaining available market, we recognized it as a “difficult problem” in our definition.  It required a different look at the inventory problem it posed.  

There were over 800 parts and the demand was totally unpredictable.  This was the market demand created by old car enthusiasts rebuilding their beloved old model car.  We analyzed the demand for these parts based upon delivered product over a 5 year period and we did the same for those orders that couldn’t be filled over those same 5 years.  In all, there were about 800 parts.  So we created a system to manage all the possibilities for those 800 parts.  There were some parts that had almost no demand so they were not included in this inventory management program.  But figuring out how to manage the 800 parts was enough of a challenge.

When old car enthusiasts knew that more than likely this business would have the part that they needed, our client would get the first call from them.  Their market demand grew and it became a mail order business as well as serving the local market.  To do that, we set up a kanban system that contained the 800 cores.  This was the challenge.  So here is what we came up with.

We started with a rack of 1600 cubicles to store the part cores.  That already existed in the plant.  Each part had two shoe boxes to contain the cores for that product.  They remained as cores until the demand came to convert them to usable replacement product.  It was assumed that most cores could be fixed with 2 cores.  Many of the old cores would have badly damaged parts that couldn’t be used in a repair.  So the inventory problem became one of profitably managing the inventory of these cores.  If you take 800 parts, times 2, they needed to have 1600 cores sitting on the shelf.  If they could keep the inventory value less than $8,000 that would amount to less than $5 per core in that inventory.  So a price of $150 to $250 for one of these remanufactured old alternators, starters and generators (plus the returned core – if no core was returned with unit add $100) would generate a huge profit for this part of the business or about 65% pre-tax profits, as it turned out.  

The inventory was managed in two ways.  First, there were two shoe boxes for each core.  When a shoe box was full, you could look at the rack and see that the shoe box was full if the red tape was not showing.  When the box was empty, it was turned around and upside down.  On the back of each box was a piece of red tape to indicate visually that the box was empty.  Finally, the inventory manager needed to order a replacement core.  But he didn’t want to pay more than $5.  If you rushed a core, you might pay as high as $60 to $80.  If however, you ordered the required cores as part of a big order, you could get the right price.  It was a lost leader for the core supplier when 400 or 500 cores were ordered.  And so, over 9 months, this core inventory was filled.  It then became a simple job to keep the inventory filled with a single sheet of paper (both sides) with the 800 parts listed and room for a check mark.  The inventory manager then worked off this sheet. Cycle counting was a snap.  Annual inventory management in this plant became a very easy process.  It took less than 1 hour to establish the inventory of raw materials from the cores.

This new business turned out to be a good idea because it put this company on the national remanufacturing scene and gave the owner visibility to the antique car market.  Additionally, it gave the senior assembler techs an opportunity to do something different when one of those orders came in.  The senior techs found the operation of these old parts to be a challenge and it kept them on their toes.  Every one of the techs wanted an opportunity to work the “95/33” cell.

As a problem solver, this was a difficult but fun project.  We got to solve 2 difficult problems with this engagement, the core business optimization and the Old Car components business.  And that gave us all great satisfaction.  

You can read more about the 5/67 Problem Solving in my recent book with Craig Humphreys with the same name: 5/67 Problem Solving: How to Solve Wicked Problems…correctly.  To buy the book: https://www.createspace.com/7576878.

How to get all employees involved in the culture of Innovation.

 

2 different teams making presentations

Solving the Common Core Problem

I walked into this client over 28 years ago as a result of a fax generated lead.  He listened to what I had to say and signed up.   He had a business that he had started from scratch and, like a true entrepreneur, he had no idea what he had gotten into.  He had dropped out of high school in his sophomore year and took a job where he learned how to repair alternators and generators.  But being the bright guy that he was, he figured he could do it just as well and with higher quality results than his employer produced and make more money at the same time.

He knew nothing about running a business but by the time I got to him, he had been in business 10 years and had 30 employees.  He was making some money, usually just enough to pay himself, his bills and live for another week.  We all know this kind of struggling business.  He knew he needed to improve his business performance, but didn’t know how.  He had no real management structure in place to hold people accountable for performance.  And his place of business was both a fiscal and physical mess.  Chaos and disorganization was the order of the day.  So my job was to help him organize his business, bring some structure where there was none, and to figure out a way to improve his business and its profits.

This was not what 5/67 Problem Solving terms a Wicked Problem  Rather, it was just a very difficult problem.  And so I used a training program that I called the War on Waste to bring some problem solving skills to his employees.  Very soon our teams  figured out that we could create a number of work cells for the most common cores.  These cells would tear down and reassemble 

the alternators, generators and starters.  The design of these cells was created in conjunction with input from all employees and we had the factory producing at 3 times previous production by end of the 2nd month.  We got the cells of these common cores into full production and

productivity increased to a consistent 10 times the original numbers. We were really excited about this.  We had addressed the common core business and had it humming along.  After we got the cells operating, we collected the following report that we call a World Record Report:

 This was an amazing result.  It showed that the team was producing 134 units to start (after we had created the work cells) and over the next 30 working days, they ended up with a World Record of 296 units.  From where they were when we started on Day 1, around 30 units a day, we grew production to almost 300 per day.  This report, was used both as a monitoring report of daily production and became a driver to optimized production by a workforce that thrived in the continuous improvement environment.

Interestingly,  what we learned in short order was that this was not a re-manufacturing business but a common core optimization business.  The core was the physical, non-working unit that was removed from the car.  When it was turned in by a customer or mechanic, a replacement unit was supplied to replace it.  So for the common cores, the 5% of the products that generated 67% of the business, it looked like a remanufacturing business.  The cells managed the common core business and the owner’s job became focused on optimization of this inventory because the production process was taking care of itself.  We trained him to think “different.”  And he learned very well.  It made sense to him.  His focus was on what mattered most.

While we were working at this business, we identified another very profitable opportunity.  The cores that comprise the 95% of the parts that only generate 33% of the company revenue, could become an opportunity to generate a highly profitable business niche.  And that was a real test of our problem solving skills.  We’ll cover that in another article.  

Dealing with the common cores was a major achievement.  There was no other remanufacturing business that operated in this way in the United States.  It turned the business into a very profitable operation which the owner sold 4 years later.  We focused on the process and figured out a way to use a number of problem solving tools that we never figured to use before we got started on this project.

You can read more about the 5/67 Problem Solving in my recent book with Craig Humphreys with the same name: 5/67 Problem Solving: How to Solve Wicked Problems…correctly.  To buy the book: https://www.createspace.com/7576878.

“Optimistic Humanism” needs “No Blame”

I just saw a 3 minute video of Steve Jobs talking about “Optimistic Humanism.” In the video he is talking about Quality and the role that it should play in a business and acknowledged by customers. His initial point in the video is that “the Japanese don’t talk about quality in any of their ads. Why?” he asks. But when you ask any American consumer who delivers the best quality and they will almost all say, “the Japanese.”

This is a significant observation because it points to the next point of his little discussion. He notes that there is a wonderful expectation that all businesses should have and that is respect of the people and the contributions that they will make. He noted that there was a humanistic characteristic of that position. To tell the world that you expect the people to deliver if given the opportunity is certainly optimistic about people. He called it “Optimistic Humanism.”

The key however is creating that environment. And that is where “No Blame” comes in.

People will deliver if they know that there is no reprisal for contributing an idea that disrupts the status quo. We call this “change without reprisal.” In Steve Jobs words, it would be “optimistic humanism.”

We have worked with that principle for over 30 years and, believe me, it is the cornerstone of all the work that I have done over those 30 years.

For me, it started early one morning in the first class that I ever taught on the Toyota Production System. After about 15 minutes, I asked the class if anyone had ideas for “muda (Japanese)” or waste that existed in their company. One gentleman in the front raised his hand and before saying anything, glanced to the back of the room, saw that there were no managers hiding in the back and immediately put his two ideas into play.

That told me something that has remained to this day, change is impossible if there is any fear of reprisal. There need to be an “optimistic humanism” in play to make the change happen. And we created that environment with “No Blame.” And in the process put over 10,000 ideas with a target of 50 to 1 into play.

Thank you.   Len Bertain

I can be reached at len@ewaronwaste.com or 510-520-8011.

How to get all employees involved in the culture of Innovation.

I wrote a response to an Internet article and I would like to share it.

I have been doing research on incremental innovation at both small and large companies for over 30 years. My research consisted of assembling teams of 4 to 6 people and giving them a goal of finding $100,000 of waste (muda) that could be fixed for less than $2,000. We called it the “War on Waste” and delivered it to over 150 companies and 50,000 employees. We implemented over 10,000 ideas in this process. Our average ROI in one study was 38 to 1. Not the target 50 to 1, but we’ll take it

My point is this (and it is discussed in my book “The Tribal Knowledge Paradigm” – Amazon): we never encountered teams where the people couldn’t find an idea to address a waste in the business. And it worked in all businesses because all businesses have processes and it is the process wastes that we address. In many cases, it was a broken innovation process that was the waste, or a broken sales process (sales manager is the problem), etc and we did all this by invoking “No Blame.” In other words, if an employee thought something was a problem, it was a problem and the people followed our 6-step process to fix it.

We have now taken the process to the Internet to help companies deal with the issue of starting the Innovation Process. People are not the problem. They will have ideas. That is a guarantee. The big issue is finding a champion for their idea. Once that is taken care of, we work a team thru the process on line: 1) find the problem; 2) identify its root cause; 3) cost out how much it is costing the company annually ($100,000 can be top or bottom line); 4) map out a solution and its cost; 5) define an implementation schedule, and; 6) implement the solution and measure its results. We do the interaction with the teams using a facilitator in half-hour sessions over a secure video-teleconferencing platform.

This is the first stage of the “culture of innovation.” These ideas typically get implemented within 6 weeks from step 1. Once the first ideas start to roll, others catch on. It may be slow to start but once it catches on, it works. (see ewaronwaste.com) The real key here is what we report in the book: “The Tribal Knowledge Paradigm.” One of the tenets of the Tribal Knowledge Paradigm is: every manager has a job to support the discovery and implementation of ideas that address issues that get in the way of implementation of Strategy. Remember: strategy is how you make money, and waste is everything in the process that keeps you from making money. Managers are sometimes reluctant to buy this but once the CEO makes it clear that this is their job, it is no longer an option for managers, it is their job. Part of their job but “their job.”

This is not obvious. If it isn’t a manager’s job, new ideas can easily get ignored. But if getting ideas in play and completed is the manager’s job, then s/he will be anxiously looking for new ideas. We learned this the hard way, if it isn’t a manager’s job, then the manager can become what we call a black knight (recall Monty Python’s movie “Search for the Holy Grail” – denying problems – like a lost arm). These Black Knights really love to kill ideas. If they do it as a manager under our proposed Tribal Knowledge Paradigm, they will be looking for a new job. Look up our website (ewaronwaste.com) and try it out. It works.

Best,

Len Bertain  len@ewaronwaste.com  510-520-8011

Using Kan Ban to Manage Business Expansion

A number of years ago, I had the privilege of meeting William Gore of W.L. Gore Associates. I was scheduled to meet with him over some technical things and toward the end of the discussion he got into how he decided when to split a division into two or more divisions.

He said that he believed that the optimum size of a business was 200 or so employees. This allowed for a very shallow management hierarchy and more importantly kept his vision of how you grow a large business with highly motivated employees.

In all the discussion about Innovation Cultures and such, very little is said about how you can structure a business to almost guarantee its ongoing innovation culture. I know from experience that it is difficult to start that discussion and sustain any progress in a 6,000 employee manufacturing facility. It is almost impossible for all the reasons everyone knows.

If there are only up to 200 people in a building, you can guarantee that if you have an idea, someone is going to listen. It just works that way. If nothing else you can stand on your desk chair and probably shout to everyone. If you look at the number of W. L. Gore Associates personnel records you will see that they have about 10,000 employees spread over 500 facilities, which works out to about 200 associates (employees) per facility. And employees didn’t have a boss, they migrated to the “leader” that they felt most comfortable with. How that works is the basis of another discussion.

What Gore’s goal ultimately was: create a culture of innovation that would sustain the company’s future. W. L. Gore Associates develops products that are based on special properties of organic chemicals that Gore discovered. His work led to other products and the company became an industrial and financial success. But it didn’t just happen.

It was based upon the following principles. I am paraphrasing these in the language that I use in the War on Waste and what we call the Tribal Knowledge Paradigm.

• Associates are encouraged to improve corporate Tribal Knowledge (both for themselves and others)
• Associates should embrace “No Blame” as the foundation of their daily activity
• An Associate makes good all commitments to clients and fellow Associates
• If an Associate makes a decision, it must not hurt the company.

That sets the stage for the point of this article.

In essence, how does an executive maintain the maximum 200 associates per plant as the business expands?

Gore was smart in that the parking lot only had spaces for parking of 200 people. When it filled up, it was time to think about some logical break-up of that facility.

The reason that this is like a Kan Ban system is that when Bill would visit a facility and he would see the parking lot getting full, he would broach the subject of a breakup of the division to his managers.

To me that is a basic component of the Toyota Production System, visual control. If all his managers knew that rule, they would start to think about this problem long before Gore raised the subject after a visit to the plant. I noted in the title that this was a Kan Ban System, but it really is an inverted Kan Ban System because it requires someone to take action when a “bin” gets full not when it is empty. But the principle is the same.

This is an out of the box solution to an issue that probably drove Bill to arrive at his solution. To me it is brilliant. But that is what all good “out of the box” solutions are.

Thank you,

Len Bertain.

A View of Pioneers and Settlers from a David McClellan Perspective

I posted an article in response to a opinion piece about Google’s understanding of the perfect team (What Google learned about creating the Perfect Team). The article is on this website and is entitled (Pioneers and Settlers on the Perfect Team).

A friend of mine, Ian Blei, commented on this and it sparked a discussion on the real issue about teams is that we really don’t understand the dynamic because of the complexity of our human nature. But we keep on trying to understand them and we are all getting better at understanding how they work. I must admit that I have a very selfish motive, if I understand them better, I can increase the value of my services to clients when we help teams identify and solve a problem with a 50 to 1 ROI during my War on Waste program.

My long time business associate, George Sibbald, and I tried to get into this in our book The Tribal Knowledge Paradigm. We referenced David McClelland, who was an American psychological theorist who focused on understanding achievement motivation. Our interest in him was that his theory of motivation guided our thinking about the keys to creating any culture, especially an Innovation Culture.

McClelland believed that an individuals needs are acquired from the culture. Therefore, from his perspective, we needed to deal with the three needs that he identified: achievement, affiliation and power. And as you read further into McClelland, you see how the Pioneer and Settler concepts emerged.

He believed that achievement motivation is the most valuable in business. And through experiential learning, achievement motivation can be increased in a population.

So when we defined the culture of our paradigm, we needed to include some of his thoughts.

An achievement-motivated person would thrive in an environment where he could take some responsibility to solve problems. He would set moderate (not extreme) goals and would be inclined to take calculated risks.  And from our perspective, one of the keys, this person would want feedback on performance. In other words, he wanted “Atta Boys.”

However, the affiliation-motivated person would want to interact socially with others. This person is concerned with the quality of interpersonal relations. Thus these relations take precedence over task results. In dealing with the multi-ethnic work groups of today’s business, this issue is big. These different ethic groups value their social interaction of family and friends. And it means that teams, which are intense social structures, are going to be important in making businesses work more efficiently.

And finally, the power-motivated person would want to obtain and exercise power and authority. This person likes to influence others and win arguments. The key to this issue is where it goes. It is either positive or negative. The negative orientation occurs when a power achiever wants to dominate instead of lead people. Of course, the positive aspect occurs when these people demonstrate persuasive and inspirational behavior. They are our leaders.

So what we takeaway from McClelland are the basics of what a culture should look like and that positive reinforcing experience can improve a culture.  All this thinking contains some guidelines for the paradigm that we proposed in our book on the Tribal Knowledge Paradigm.

You can read more about this on the War on Waste Academy website: http://www.ewaronwaste.com. Go to the Blog (Len & Craig’s Blog) to see more material.

Thanks,

Len Bertain