As a case in point, I met a family in an airport that owned a family business. Recently, they had outsourced all of their production and their involvement now was more focused on managing client relationships as well as coordinating the availability of their proprietary packaging for their new product supplier. They expressed to me that they were struggling with controlling packaging costs and that each quote was typically higher than the last. When asked how they worked with this supplier, they responded that they had worked with this same supplier for years and issued purchase orders that covered just a few months of demand. Also, even though they had longer term commitments and reasonably-established production rates with their product supplier, they did not share this future demand information with this packaging supplier. After sharing this information with me, they asked my opinion on where they could improve.

I made the following suggestions, and these are applicable to almost any purchasing environment:

1. Create and manage at least a one-year-rolling forecast of the business by product line and update this forecast at least several times per month.
2. As appropriate, also include breakdowns of these forecasts so that it creates demand visibility for key purchased commodities or parts from these suppliers and share this information with them.
3. When working with the supplier set up the following arrangements.
   • Enter into longer-term blanket order relationships, such as six months or one year, that will establish a price baseline on items they sell.
   • Utilize the forecasts to provide the supplier with visibility on the planned demand as well as indications of shifts in demand or volume changes as well as indications for product design changes that will impact the product they provide to your business.
4. Structure the purchasing agreement so that your business can heavily influence or control price changes.
   • Where possible, freeze the prices for the duration of the agreement.
   • Factor in inventory carrying costs as well as freight into all negotiations and use this as another means of helping your price position.
   • If the supplier’s costs, and resulting pricing, are heavily dependent on commodity markets, then establish baselines or a commodity price standard for the agreement and then stipulate that increases, as well as decreases, will be tied to this commodity price benchmark, which in this case was corrugated paper of certain pound weights.
   • Agree on the frequency in which both of your businesses will review price increases together, such as quarterly, due to the commodity price changes.
   • Insure all other non-commodity costs in their prices are frozen during the time period of the agreement so only the commodity-affected costs are considered in price changes.
   • Establish your own in-house capabilities to review the same commodity indexes that these suppliers watch so you are able to take advantage of opportunities or minimize the consequences of pricing changes in these markets.
   • Proactively initiate mitigating actions that include purchasing futures or providing purchase orders to purchase a quantity of raw materials to lock in these costs for a time for your business and the supplier.
5. Work with the supplier on joint Value Engineering programs where both businesses will commit to work on cost reduction efforts where the savings are shared.
   • This arrangement will insure that the supplier will help reduce costs, and associated pricing, where normally it would be against their self-interests to do so.

Many businesses, such as the one described above, have the majority of their costs managed through their purchasing department so it is strategically important to improve the processes and disciplines in this area of supply chain management. Creating longer-term planning disciplines will pay large dividends by both controlling purchasing costs as well as insuring that the company will have the purchased items it needs when it needs them and not before. In addition, creating innovative negotiating terms and structures, such as the ones described above, will allow the business to have much more influence over the purchasing process as well as improve their ability to successfully negotiate lower prices as well as mitigate or minimize impending price increases.

How then do we properly apply the Lean concepts so that they help the business? I will cover just three areas of the many improvements that must be in place for a successful Lean implementation program. The three I will address here will all be related to quality process and discipline improvements.  First of all, in order to run a Lean operation effectively, there needs to be much greater attention paid to product quality. If fewer parts are in stock, any defective parts or products will have a much greater negative impact on meeting short lead time commitments, because there is limited additional inventory to cover losses. Likewise, process quality can have the same impact in that if the part is damaged in the process, or the process does not consistently provide a finished product that conforms to specification, then the part must be either repaired or replaced, both scenarios that would require lead-times in excess of a true lean process. In both cases, there will simply not be time to make up for the lost parts and the fulfillment system will fail to meet planned expectations. In summary, product designs must be refined to support high quality products while process capabilities must be robust and capable enough to consistently meet specifications.

The last issue on this theme is in the quality of information and this is very often overlooked. A typical objective of Lean systems is to dramatically reduce response time and to accomplish this task with much lower inventory levels. Often, the implementers have a shortsighted approach that focuses mainly on the parts delivery system which is at the output end of the process. However, our experience tells us that we must think and act globally in order to be successful.

Since the 1980’s, we have managed the successful implementation of hundreds of cellular pull environments with the use of thousands of kanbans, with most of these refined processes taking weeks of lead-time and reducing them to only a few hours in the new Lean processes. From these many experiences, we found that there was an unexpected paradox in that in order to set up successful rapid response Lean systems we must actually improve our ability to plan effectively much further into the future. For example, in one of our first full JIT plants, we reduced our response time on orders from lead-times of sixteen weeks of production to just four hours with a corresponding 88% reduction in total inventory levels. However, in order to successfully plan our long lead-time components, deal with demand seasonality and capacity loading, it necessitated that we create a master production scheduling discipline that managed one full year into the future. We discovered that without substantially improved information disciplines that allowed us to view the future and affect it with planning, we could not create and manage a very responsive production and supply chain environment that could react and ship complete orders in just a few hours. You can view the details on this very successful project on this website at the following link: http://www.bottomlinefix.com/case-study/retail-product-manufacturing-business/

In closing, implementing highly-effective Lean programs is very dependent on understanding and correcting all of the factors and inputs that affect response issues, and in this article, we have covered just a few of the many that must be considered. Contact a seasoned Lean implementer such as Lean Enterprise Solutions if you wish to insure your success and spare yourself the frustrating consequences of a shortsighted implementation program.

In almost all of my situations, the scenarios were similar in that the investment group typically stepped back after the purchase and allowed the management team to run the business. They might call each week to discuss sales and earnings projections and would visit the business once or twice a quarter to have a face to face meeting. They typically did not get involved in the details until the performance started to deteriorate and that was where I would come in. However, I am of the opinion that had they been more proactive in running the business, most of these performance issues would have never occurred. In fact, I believe that if they had been more involved in the business from day one, the performance of the business would have been substantially better thereafter.

Given these predictable conditions, what should be done? I would recommend the following:

During the due diligence process, have an operations expert audit the following:

• Validate the cost numbers driving product and overhead costing.
• Validate the inventory values and review how much excess and obsolete inventory exists.
• Review potential environmental risks and exposure, especially if purchasing property.
• Evaluate the effectiveness of the manufacturing quality and production processes.
• Evaluate the effectiveness of the production and materials management team.
• Utilize this information to add to the understanding of the business as you create the value for the business and start negotiations.

After the sales process, immediately begin working with the management team to evaluate how to improve business performance.

• In today’s economy, every business should be proactively going after waste in every area. Every department, process and position should be evaluated.
• Insure that each function that drives cost is providing a measurable return.
• Optimize the accounts receivable and payable process to increase cash generation.
• Work with purchasing and materials management to drive purchasing cost reductions as well as reduce inventory levels and increase inventory turns.
• Work with production to improve productivity.

Just as everyone should get a routine physical checkup, a business organization is no different and yearly audits should be performed to check on the health of the business to see if follow-up work should be performed.

I understand that this is a much different role than what many private investment groups are comfortable with. Typically, they purchase businesses that meet a threshold of earnings and have a credible management team. They are comfortable to stay at arm’s length with respect to the details of the business. However, based on my experience, a more-engaged approach could easily move 5% or more from COS to the bottom line on a $20M business. This $1M added to EBITDA each year would add $5M or more to the sales amount at the transaction point. This would be a sizable upside on the transaction of a business of this size.

I am of the belief that if a business is not moving forward in improving its performance, then it will actually lose ground and I have seen this scenario manifested consistently throughout my career. In the case of a future transaction, this lost momentum could delay it, or at a minimum reduce its value. I believe it is much better to take the proactive role and have the high potential of an upside than to take a hands-off approach that has a high likelihood of reducing the rewards at the transaction.

Of course, the question would be how to pull this off without alienating the management team of the purchased business. First of all, it is important to acknowledge that you are the new owners and you have every right to get involved in the details. It is not for their approval but it is only for their information. The second point is that there is an excellent way to capitalize on these opportunities while still allowing the private equity managers to continue to focus on running their business. This approach would be to partner with an operations consulting group with a track record of success in working alongside management in these situations. This group would exhibit the following behaviors in working with the management team.

1. This group will insure that the ideas are created, owned and implemented by the management team.
2. This group will insure that the management team gets the credit for the positive changes.
3. This group will help create an incentive or bonus program for these key managers to insure that they are rewarded for their proactive behaviors.

I encourage you to start today. Give us a call and we can discuss our successes in these sensitive situations. In these roles, we have consistently delivered dramatic improvements in operating performance that positioned the portfolio companies for a more profitable future transaction.

First of all we should develop a common understanding of a work team. I would define a work team as follows:

“A group of people that are self-directed in efforts, jointly accountable for their outputs, and united in working towards a common purpose.”

Let’s break this definition down more and expand on the definition. I believe that using a football team as an analogy will be helpful in better understanding the makeup of a work team. First lets define the characteristics of the group. Similar to the makeup of a football team, the group will be comprised of people with different skillsets and defined duties relevant to those skills. Each team member has special skills but can be called upon to perform the skills of others in certain situations. The entire team benefits if each person is skilled in the tasks of others as well as their own and will improve the overall effectiveness of the team.

With respect to being “self-directed in efforts” each football team player, when prompted, must individually exhibit their skills to properly execute a specific play. They also have a leader on the field – a quarterback or defensive captain – that is skilled in perceiving a change in the opponent’s actions and empowered to signal the team members to execute another play. In both cases above, they are being self-directed in that the team members are making the decisions on the field.

As for the team being “jointly accountable for their outputs” each player knows their assignment and is accountable to execute it upon demand. If mistakes are made by even one individual, the probability of success for the team is minimal. However, if they all execute their tasks correctly, the chances are very good that the team will make yardage on that play.

The last part of the statement, being “united in working towards a common purpose”, is the most important. The football team is united in the mission of scoring more points than the opposing team and thereby winning the contest. In order to meet this objective, they must execute each of their individual tasks effectively, such as blocking, running, or catching a pass, and make the proper adjustments as the game unfolds. The proper execution of each individual task during each play will allow the team to gain yardage and make touchdowns. If they can execute their plays better than their opponent it can yield the completion of their overall group task which is to win the football game. After reviewing the above analogy to a football team one can see how it could be extrapolated to many different business processes.

In business situations, why would you use work teams? There are many reasons to use teams and they are listed below:

1. Improve communication. For example if a customer order currently must go through three departments to complete, why not create a team with all three functions in order to complete the order in one group? All communications pertinent to that order will now be focused within that one group thereby eliminating confusion and improving response time and accuracy.
2. Reduce response time. In performing any operation with several steps, the largest component of the task’s lead-time is often queue time or time that the product or service is waiting in line between processing steps. Using the same example above one can see that performing all the operations in one group or department would save response time because the queue time between the departments would be eliminated.
3. Reduce floorspace and WIP inventory needs. In a production situation, there is also a direct correlation between lead-time and inventory. Where lead-time is reduced work-in-process (WIP) inventory is reduced proportionately. Because team environments require less WIP inventory and the team members tend to work in closer proximity to each other we have seen a significant reduction in the shopfloor space required after the teams are operational.
4. Improve quality. Another great advantage of work teams is increased accountability. Often a product or process has multiple departments involved in its processing. If not captured at its source, a quality problem can be passed on to subsequent departments and eventually to the customer. When the problem is finally discovered there are many departments that have been involved. Therefore it is hard to get closure on where the problem originated and, if corrected, to have confidence that it will not reoccur. If one team performs all the work there can be no confusion on where the accountability lies. For all these reasons quality problems are much easier to identify and correct in a work team environment.
5. Improve productivity. Accountability also plays a major role in this area. If a product or process has value added to it in many departments it is often hard to assign cause/effect relationships to productivity problems. In a team environment, all the value-added processing has been added in that one area. Therefore, it is easier to measure the performance of that group and assist them in improving the output of their efforts. In addition, because they are self-directed by nature, the work teams will often initiate their own efforts to improve productivity, including self-policing the performance of their own members, without an outside prompt from management.
6. Improve training. Another benefit to work teams is initial training and subsequent crosstraining. Because the members of the team work in close proximity to each other on-the-job training can occur all day long, either directly or indirectly. In many business environments, this is the most cost-effective means to train personnel. Work teams are also the best environments to implement and support Pay-for-Skill programs that can provide financial incentives for the employee to learn and apply more skills.
7. Reduce turnover. A major problem for domestic companies has been the turnover of their skilled employees and their inability to rehire qualified people to refill the open slots. Assuming pay scales are adequate a team environment fulfills the higher level or psychological needs of employees and helps retain them in the company. In addition, as new employees come into the company they immediately have a personal association with the small group and feel connected to the company. 
8. Develop new leaders. To effectively manage a work team there must be someone within the team with authority and accountability over the tasks performed. In most cases, they are a working peer of the group and are chosen by management because they display leadership qualities. Over time additional individuals are identified as potential leaders and are given opportunities to develop their leadership skills. In turn, they will become the leaders of new work teams.

Applying Teams in Your Business

You may now be asking if teams would be useful in your business. Also, where has our consulting group had experience in using teams effectively? In office and administrative support situations, we have organized product development groups made up of marketing, engineering, financial, and manufacturing representatives that have substantially reduced the time it took to develop and manufacture profitable new products. Also, we have created work teams dealing with the order filling process starting at order entry and going through shipping the product. In the materials management area, we have created work teams that included production planning, purchasing, and inventory management and they managed all materials actions and production scheduling for departments or product lines. In these listed indirect functions, improved communication was the main objective in creating the work teams. In all cases, the team environment substantially enhanced the task performance of each group.

In the manufacturing setting, we have created a variety of work teams that have integrated robotic welding cells, CNC machining centers, and other highly automated production environments.  We have successfully launched countless work teams dealing with basic assembly processes in a variety of industries and technologies. In addition, in complex final assembly operations, such as in heavy equipment manufacturing and truck equipment installation, teams were used very effectively to generate significant improvements in all areas of performance measurement. In almost all cases, the benefits included all eight categories listed above which ultimately led to reduced costs and cash needs, and higher profitability for the company.

In closing, we have great confidence that work teams work well in all office, distribution, and manufacturing environments. The only constraint to using them effectively is one’s own creativity and self-imposed limitations. The bottom line is that the benefits to the organization are too great to ignore implementing these concepts and we therefore encourage you to take the plunge and integrate team concepts into your own business environment.

It was now late morning as we were finishing the harnessing of the young gray Percheron mare. She was harnessed and standing in the stall calmly eating hay. Dad left the barn for a few minutes and returned leading an older Percheron mare into an adjacent barn stall to begin harnessing her.  She was a few years older, much heavier, and would probably be able to pull much more than the young mare. After asking questions about the older mare, my dad explained to me that in order to maintain a level of control in the training process, a young horse is generally teamed with an experienced horse. Because she was trained and experienced the older mare would facilitate better control of the wagon, provide pulling power, and be a stabilizing influence for the younger horse.  

As we harnessed the horse she was almost oblivious to the routine and stood in the stall unconcerned as both of us worked around her.  With my limited help it took less than ten minutes to harness her.  We paused to drink a cup of coffee and watched both horses munch on the hay. We talked about the next step, hitching the horses to the wagon, and decided to take the wagon out to the farm ground nearby and bring back some hay bales to the barn.

Finishing his coffee my father led the older mare out of the barn and near the wagon.  Leading her along the right side of the wagon tongue he connected the front of her harness to the neck yoke, a short bar crossing the end of the trailer tongue, and then tied up her halter rope on her harness.  Gently pushing on her right rear hip he nudged the horse over towards the tongue and then attached the two pulling chains on the rear of the horse’s harness to the single tree.  This single tree is attached to the end of a long, pivoting bar – about four feet in length – that is connected to the trailer tongue by a heavy pin and bearing. This bar is called the “two-horse evener” or “doubletree” and is what transfers all the pulling force of the team to the tongue of the wagon. In addition, it is also used to split or level the pulling load between the two horses, and if need be, can be adjusted to compensate for the different pulling capabilities of the horses.  After she was hitched up the mare stood there calmly chewing on her bit.

Reentering the barn, my father emerged leading the young gray by her halter rope, talking to her as he led her to the wagon. This time he walked down the left side of the wagon tongue and hooked up the front of her harness to the neck yoke and tied up her halter rope. Moving to the rear he pushed on her rear hip to move and tentatively she shifted over next to the trailer tongue. Cautiously he hooked the pulling harness to the pulling tree and stepped back.  The young gray immediately bolted ahead taking the slack out of the pulling harness and jerked the wagon ahead a few inches.  The other horse was pulled back as the doubletree pulled on her harness.  The older mare was alarmed by the sudden movement but stood her ground.

Still fearful of the sudden confinement the young gray stepped over the tongue with her right rear leg. Immediately the older mare kicked the young horse and she instantaneously stepped back over the tongue.  Both horses now stood there, ears back and nostrils flaring. The young horse now knew the extent of her boundaries. Seeing she was settled down a bit we quickly hooked up the reins and then climbed on the wagon. My father cracked the reins and, with a sudden lurch, the horses started the trailer towards the road.

As we pulled onto the road the older mare established a steady walking gait. The young horse was lagging a bit and Dad snapped her reins and she sped up, trying to carry the full weight of the wagon by herself.  A few moments later she again started to lag back, there was a snap of the reins, and again she raced ahead.  She repeated this behavior for the full three miles to the farm.  As we stopped to open the gate at the haystack we could see that the young mare was covered with sweat, both from her fear and because of trying to pull the full weight of the wagon alone.  The older mare was fine, showing little sign of exertion. Once inside the gate my father guided the wagon alongside the haystack, the horses straining to pull the wagon through the knee-deep snow.  After stopping parallel to the haystack we loaded about 40 bales of hay on the wagon. We talked for a while and gave the horses twenty minutes to rest.

Next we climbed onto the wagon, pulled out of the gate and I jumped down to close it behind us. Climbing back on the wagon my father cracked the reins, and with the horses laboring in their harnesses, we started off down the country road.  Loaded with the hay the wagon was definitely harder to pull.  Flexing against her harness the older mare instinctively established her gait while the young mare again lagged back against the heavier weight of the wagon.  My father cracked the reins to speed her up and she pulled forward on the load, once again trying to pull the entire weight of the wagon. This happened several more times and then suddenly, the point must have hit home. She backed off a little and began matching her walking rhythm with the older mare. Soon she began trying to keep her head even with the older horse and only occasionally did we have to prompt her with the reins.  The young gray Percheron was now pulling steadily and both horses were sharing the load, making it easier for both members of the team. Even though the load was substantially heavier on the return trip the horses appeared to handle the load with less effort. The horses worked well together for the balance of the trip.

Arriving at the barn we unloaded the hay and unhitched the team. We led them into two adjacent stalls, pulled the harnesses off them and brushed them down as they ate hay.  Afterwards we led them out of the barn and released them into the field. The two horses ambled off together towards the water trough. 

It had been a great experience to watch the horses learn to pull together as a team.  As I considered the wagon ride I could see many parallels that can be drawn with teamwork in an organization. Listed below are the parallels I believe are appropriate to us. 

1. Team up inexperience with experience.  In the story above, the young mare was teamed up with a seasoned horse to both provide control of the wagon and provide consistent pulling power. In a work environment, the quickest way to integrate new employees is to put them into existing experienced work teams. In these teams, they have someone to mentor them, answer their questions, provide a personal connection with other employees, plus insure that their efforts are productive in supporting the organization’s objectives.
2. Uniqueness on a team is not a problem.  The two horses were dissimilar in capabilities, both from a knowledge and pulling viewpoint. In my opinion, the most successful teams are ones that have members with a variety of skillsets and capabilities. In these teams, there is a better environment for crosstraining and therefore workers will learn a broader variety of skills and do so much quicker.  Finally, the unique skills tend to make the members see the big picture, produce more output and perform less rework.  The individuals on the team both supplement and complement the skills of their teammates.
3. They had unique development needs. Each horse was in a different stage of development and would require unique attention to optimize individual performance.  Obviously one was contributing more to the pulling of the wagon while the other was making many mistakes and perhaps working too hard for her pulling contribution. Because of the development needs at the time most of the attention was given to the young mare. In a team environment, one must understand that much of the training will need to be performed on an individual level and obviously with the newer employees. However, training programs should be tailored to supplement the skills of the senior employees also. In both cases, these newly acquired skillsets will improve the team’s overall performance.
4. They had common objectives.  Both horses were attached to the same wagon and were sharing the load through the doubletree. Likewise, members of a team must be connected to the completion of one major task as a team. As individuals, each team member may make a different contribution to completing the task but they are tied to one common overall objective.  Another point to consider is that all participants will not contribute to the same level.  The doubletree on the wagon could be adjusted to allow one horse to pull more. Likewise, teams will always have individuals that are top performers and they will naturally carry more than their share of the load.
5. There was synergy in the outcome. In a given instant, either horse could display tremendous strength and perhaps set a new personal record in pulling. However, on an ongoing day-to-day basis, a team of horses will out perform the level of work done by the two horses working separately. In my years of experience, I have seen the following team dynamics.
   • Team members expect more of each other and will push each other to achieve higher levels of individual and team performance.
   • They will assist each other as the need arises, whether in training, physical assistance, or personal encouragement.
   • If there are poor performers on the team that will not step up their personal performance to meet the expectations of the team then the team members themselves will often press to have them replaced.
   • Teams will be self-directed in developing ways to optimize their performance.
   • Turnover will be substantially reduced once someone is fully integrated into a team.
   • In general, teams will share some resources and will work together in closer proximity to each other and will therefore generate more output for a given amount of floorspace or other resources.
   • The bottom line is that the synergy of the team will allow higher performance levels than could be achieved as individuals working alone.  One plus one can equal three!
6. Equal rewards for all team members.  At the end of the day both horses were rewarded with the same amount of hay and personal care even though one horse may have pulled more than the other.  In many team environments, there are individuals that are compensated more because they are in a leadership role or are technical experts. However, to make the teams work well together a portion of their pay must be tied to meeting team objectives. This can include customer service and quality objectives as well as pay for applying new skillsets that improve the team’s overall performance.
7. Team leadership is critical.  There was a third team member that we did not talk about much and he was the most important. He was the wagon driver or team leader.  My dad was able to optimize the pulling of the team of horses by continually reviewing the performance of each horse during the pull. He would then make immediate corrections with either horse to insure the team achieved maximum performance at all times.  Likewise, team leadership must be intimately involved, actively working within the department or cell, reviewing outcomes, and immediately making corrections. In all of the team environments we have created, we believe that the team leader always plays the most important role.  Also, there is no team too small to necessitate having a leader.  In some instances, we have set up successful two-man teams with one being the team leader.

In the last 100 years in the United States, we have seen major changes in how to improve the productivity of the average worker.  At the start of the 20^th century Henry Ford perfected the assembly line process and today there exists machining and assembly systems that are integrated with robots that work in a “lights out” factory environment. Both of these systems are very productive but in most cases they are costly, inflexible to change, and only work within a narrow set of design parameters. Starting this current century many companies are looking for other options to continue increasing their productivity. They are looking for simpler, less costly, and more flexible business and production systems. I believe studying simpler, low tech team models, such as depicted in this story about the team of horses, will furnish us with the new methods necessary to provide superior customer service and financial performance in a more cost-effective manner. In two weeks, another published article will cover teams in more detail.