TBM OpEx Review October 2013

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Should your company relocate part or all of its supply chain to the United States? According to Dave Johnson, Senior Vice President for Global Operations and Quality at STERIS Corp., and an expert on the topic, it all depends on your customers. “Relocation of the supply chain must be driven by customer needs and business strategy, not opportunistic cost reduction or labor arbitrage,” says Johnson, who has been successfully leading reshoring efforts at Mentor, OH-based STERIS. “Reshoring should not be done for altruistic reasons, such as local job creation, social pressure, patriotism or politics. Reshore only because it makes strategic sense for your business and your customer’s business.” STERIS, a $1.5 billion global leader in infection prevention, contamination control, and surgical and critical care technologies, recently began insourcing $50 million worth of fabricated metal components from suppliers located in Asia, Europe and Canada to two company-owned sites in Ohio and Alabama. www.tbmcg.com October 2013 | Issue 4 A TBM Consulting Group Publication OpEx Review STERIS created a comprehensive decision-making model for insourcing and reshoring that is focused on selecting a location that best serves customers‘ needs. ALSO IN THIS ISSUE: 2| Leading oughts: A Model Renaissance Strategy 6| Leadership: Pactiv CEO Pursues 1-on-1 Engagement 9| Strategy: Critical inking Cues 12| Certification Training: 2014 Course Calendar STERIS leader shares the secrets of his success. Staying Ahead of the Competition: The Real Reason to Reshore (continued on page 3)

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TBM OpEx Review. A business journal for leaders striving for operational excellence. This issue features Reshoring and a success story from STERIS, John McGrath, Pactiv CEO and President discusses his unique leadership style, and guidance about how critical thinking skills affect the organization (and how to course correct when necessary).

Transcript of TBM OpEx Review October 2013

Page 1: TBM OpEx Review October 2013

Should your company relocate part or all of its supply chain to the United States? According to Dave Johnson, Senior Vice President for Global Operations and Quality at STERIS Corp., and an expert on the topic, it all depends on your customers.

“Relocation of the supply chain must be driven by customer needs and business strategy, not opportunistic

cost reduction or labor arbitrage,” says Johnson, who has been successfully leading reshoring efforts at Mentor, OH-based STERIS. “Reshoring should not be done for altruistic reasons, such as local job creation, social pressure, patriotism or politics. Reshore only because it makes strategic sense for your business and your customer’s business.”

STERIS, a $1.5 billion global leader in infection prevention, contamination control, and surgical and critical care technologies, recently began insourcing $50 million worth of fabricated metal components from suppliers located in Asia, Europe and Canada to two company-owned sites in Ohio and Alabama.

www.tbmcg.com

October 2013 | Issue 4

A TBM Consulting Group PublicationOpEx

Review

STERIS created a comprehensive decision-making model for insourcing and reshoring that is focused on selecting a location that best serves customers‘ needs.

Also in this issue:

2| leading Thoughts: A Model Renaissance Strategy

6| leadership: Pactiv CEO Pursues 1-on-1 Engagement

9| strategy: Critical Thinking Cues

12| Certification training: 2014 Course Calendar

STERIS leader shares the secrets of his success.

Staying Ahead of the Competition:

The Real Reason to Reshore

(continued on page 3)

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LEADInG ThOuGhTS

Anyone who keeps up with U.S. business news has likely heard the catch-phrase “manufacturing renaissance” in the past two years. Some say the term is too optimistic considering the dominance of U.S. manufacturing at its post-WWII peak; and then such people usually quote a digit—either the number of factories or manufacturing employees in the United States compared with yesteryear.

This assertion misses the real point. The reshoring we are seeing is about customers

and costs, not about bringing jobs back. In fact, most of the work is being absorbed into existing operations that have implemented lean and are leveraging free capacity to support this work.

The truth is that manufacturing has evolved into a highly sophisticated, tightly controlled business that can do so much more with so much less. U.S. manufacturers are smarter, leaner and more sustainable, and thus so competitive that in some cases they can better serve customers and achieve strategic goals by reshoring and insourcing work from low-labor-cost countries.

Economic conditions and shipping costs play a role in this continuing trend, but the most significant driver is the insight, knowledge and skillful planning that manufacturing leaders such as Dave Johnson have put into action. Johnson, Senior VP for Global Operations and Quality at $1.5 billion STERIS Corp., is behind the insourcing worth millions of dollars of fabricated metal components from suppliers located in Asia, Europe and Canada to two existing facilities in Ohio and Alabama. STERIS will save millions of dollars a year in outsourcing costs. Both sites combine lean manufacturing with the latest digital production technology and have become models for the company.

But it’s STERIS’ customers that receive the biggest benefits in the form of more flexibility and higher quality. And this is what imbues Johnson’s advice to other companies on reshoring: “Relocation of the supply chain must be driven by customer needs and business strategy, not opportunistic cost reduction or labor arbitrage,” Johnson says. “Reshore only because it makes strategic sense for your business and your customer’s business.”

Ken Koenemann is Vice President of TBM Consulting Group.

A Model ‘Renaissance’ Strategy

Publisher Anand Sharma: [email protected]

Executive Editor Angela Scenna: [email protected]

Associate Editors David Drickhamer Jon Katz Tonya Vinas

Contributors Dave HicksKen KoenemannBeth MorrisonMike SerenaDan Sullivan

Art Direction and Design Crossbow Group crossbowgroup.com

Printing Carter Printing & Graphics, Inc. carterprintingnc.com

October 2013 | Issue 4

A Business Journal for Leaders Who Embrace Operational Excellence

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quality and efficiency,” says Mike Serena, VP for Medical Products, Pharmaceuticals and Industrial at TBM Consulting Group. “This means a greater need for innovative tools to build or relocate smarter, leaner and more flexible factories, which are collectively referred to as digital factories. They use highly sophisticated tools and technology that improve communications and track real-time results.”

At the Ohio site (now called the Mentor Manufacturing Center or MMC), all new digital, precision-production equipment is configured in value streams, enabling STERIS to produce greater customized components faster with more consistent quality.

“We are seeing the convergence of computer technology and lean to enable true digital manufacturing, which enables the U.S. to effectively compete with virtually any region of the world,” Johnson says.

Before investing in these technologies, though, companies should follow STERIS’ lead in applying lean tools and methods to plan the insourcing for the highest-possible level of efficiency improvement.

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(continued from page 1)

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The plants supply parts for the company’s washing systems (Mentor, OH) and surgery-suite systems (Montgomery, AL).

Reshoring and insourcing enable agility and localization for STERIS. Specifically, the company insourced its metal fabrication work for these products to:

• increase production flexibility, • improve quality, • reduce delivery lead times, • control the entire design process, and • improve net costs.

To make insourcing possible, STERIS created space within the existing sites using 3P tools. “Leveraging our existing overhead structure and management talent was a key component of the strategy,” Johnson says.

The company has created a truly digital manufacturing environment that combines lean concepts with the newest production technologies, mobile communications, and the accompanying skills that will continue to improve responsiveness, quality, and efficiency in support of its long-term growth goals.

“Over the last several years, the industry has experienced a need for greater worker technical acumen to ensure better

Technology plays a big role in keeping everyone informed and accelerating response time. Dave Johnson and Site Director, Rossmald Heredia, review an alert message that is communicated automatically to his smartphone. Inset: Close-up of the alert that Dave received.

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Ralph Phillips monitors real time digital feedback on the brake press.

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escalate, and that 70 percent of the executives believe that sourcing in China is more costly than it looks on paper.

Today, companies have to evaluate multiple criteria when deciding where to place manufacturing. Direct component costs are not among the five leading strategies contributing to competitive advantage (See Figure 1). According to Johnson, it was not a primary consideration for STERIS when deciding to insource or reshore.

Johnson and his team took a fresh approach by evaluating the fully landed cost as opposed to unburdened purchase pricing. According to Johnson, this realization is a crucial point for understanding the true value of reshoring/insourcing. Most organizations still look at purchase price and measure purchase-price variance. Procurement functions are incented around these metrics and so tend not to consider costs such as freight, import duties and tariffs, and inventory-carrying costs.

Debunking the unburdened purchase price motive is particularly important at lean companies that are considering reshoring because after a manufacturer has drastically reduced inventory and improved productivity, labor can end up being a relatively small portion of total cost.

STERIS continues to look at other insourcing opportunities, and according to Johnson, “We’ve already identified $15- 20 million in work that will be manufactured domestically.”

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(continued from page 3)

Looking Beyond Traditional Cost Measures

In his frequent presentations on reshoring, Johnson often cites research conducted by The Boston Consulting Group (BCG), which published a landmark report on the future of U.S. reshoring and the declining low-cost advantage of China in 2011.

Johnson quotes BCG analysis, which summarizes that about 92 percent of manufacturing executives believe that labor costs in China and other low-cost countries will continue to

A team of STERIS employees reviewing the hour-by-hour charts and SQDC boards.

RESHORING

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Manufacturing Flexibility

Product Quality

Continuous Improvement/Kaizen

Product Innovation

Time-to-Market

Sourcing Effectiveness

Demand Forecasting/Planning

Supply Chain Management

Collaborative Engineering

Product Lifecycle Management

66%61%

51%46%

34%33%

31%30%29%

16%

Figure 1: Factors Contributing to Competitive Advantage

Source: BCG Analysis

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Build a Strategy Around High-Level Goals

On a company-wide level, sustainability of these opportunities won’t come automatically. It will come from moving forward with a well-planned strategy that aligns with company goals.

STERIS identifies opportunities for insourcing that align with the company’s strategy by using the following criteria. An opportunity must:

• Be customer-driven, with customer demand “pulling” the project.

• improve quality.• Build on the foundation of lean principles.

> Require few control points, simplified operation, pull model.

> Promise productivity improvement. (i.e., less transport, storage, walking, transactions)

> Incorporate visual value streams.• Require no new brick-and-mortar investment

and retain capacity for growth.• Fit in with existing core competencies.• leverage existing management teams.• have sufficient access to a readily available and

cost-effective labor market.• ensure minimal disruption to existing operations.

According to Johnson, the Ohio/Alabama insourcing project followed these steps:

1. The STERIS management team established the above criteria for identifying and prioritizing opportunities. In keeping with STERIS’ strategy to promote a regionalization strategy for production, the reshoring initiative was focused on its North American plants, which mainly service the North American market.

2. They then estimated the potential capacity of the North American sites after “getting lean” and began to apply lean improvements according to a “Plan for Every Plant.” Another part of STERIS’ insourcing strategy was to investigate what public-sector incentives were available from states where plants were located.

3. Johnson’s team then conducted a closer evaluation of plants that met the criteria by creating an Insourcing Site Decision Matrix (See Figure 2), that ranked sites according to Yes, No or Possible based on multiple factors. Two top opportunities emerged: a distribution center in Ohio, and the Alabama facility.

Conclusion

Although the STERIS story can serve as a good model for companies that want to insource or reshore, company leaders will need to modify details based on alignment with their organization’s culture, strategy and goals. It’s probably true for most companies, though, that taking what can be a drastic change of course will require a champion to see it through—such as Dave Johnson was for STERIS.

“He serves as a model of tenacity in his pursuit of Operational Excellence,” Serena says. “He continues to build and develop a management-team infrastructure that not only thinks from an outside-in customer perspective, but also how to best produce STERIS products that can be innovatively produced and distributed to significantly reduce leadtime and meet customer demands.”

nA Facilities Existing or Potential Space

Existing Machinery

Accommodate Final

Assembly

Increase Site Complexity

Proven Management

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Cost Effective

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Preserves Capacity for

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Minimizes Business

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Significant Capital

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Figure 2: STERIS: Insourcing Site Decision Matrix (Example)

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Patrick Hanagan sets up and operates a two-dimensional laser.

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By David Drickhamer

When Pactiv CEO and President John McGrath visits one of the company’s 50-plus facilities, the agenda usually includes a small group meeting with around 20 hourly employees. He looks forward to the opportunity for some two-way conversation and sharing what’s going on in other parts of the company. It also gives him an opportunity to talk about one of his favorite topics: How Pactiv makes money.

“I start out with the premise that we’re in business to make money,” McGrath explains. “Then I walk through the process of what we do, which is take a bunch of random raw materials and convert them into something we can sell for more than what it costs us to make. What’s left over is called profit. We’re in business to make more of that stuff called profit.”

That introduction leads to the three ways the company can generate more profit: 1) sell more, 2) raise prices, or 3) reduce costs. The point is to explain why the company needs to continually improve productivity and take costs out.

Leadership Is a Contact Sport

Pactiv CEO and President John McGrath talks about the importance of getting out of the office, cascading goals, nurturing talent and how his company makes money.

ABOUT PACTIVHeadquartered in Lake Forest, Ill., Pactiv Foodservice is part of the food-packaging and consumer goods business of Reynolds Group Holdings, which is owned by Rank Group, a privately held investment firm based in New Zealand. Pactiv employs 12,000 people at 57 locations in seven countries. It is the world’s largest manufacturer and marketer of foodservice disposables and food packaging.

John McGrath, Pactiv’s Chief Executive Officer and President, has been with Pactiv and its predecessor companies for almost 29 years. After graduating from West Point and serving for five years in the U.S. Army, he started his career in a variety of sales and engineering roles.

Prior to becoming CEO, McGrath was Vice President of Sales, Marketing and Product Development for Pactiv’s foodservice and food packaging division, General Manager of Pactiv’s food processor business, and Vice President of Logistics. McGrath is past chairman of the Foodservice Packaging Institute and a member of the Board of Directors of the International Foodservice Manufacturers Association.

LEADERSHIP

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“It’s a pretty robust exercise where we get input from the whole leadership team

with the ultimate goal of walking away with anywhere from five to seven annual improvement priorities,” says McGrath.

Some of those priorities stay at the leadership team level, but most are cascaded down through the next three levels of the company. Directly below the leadership team are the company’s eight value streams, which collectively generate almost $4 billion in sales annually. Each value stream is united by product type, paper cups and paper cartons, for example. The next level down consists of the functional areas, such as finance, human resources and engineering, which support the value streams.

“Level four is either the manufacturing plants and warehouses, or the individual sales teams. That’s where we get really, really granular around what we want to get done,” McGrath explains.

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“When people understand why you’re doing something, even though they may not like it, they’ll get it done,” he says. “Too often people are told to do things without any explanation.”

From Strategy to Execution

Pactiv manufactures foodservice disposables and food packaging. Acquired in 2010 by Rank Group, a private holding company based in New Zealand, sales have grown significantly through subsequent acquisitions.

McGrath says policy deployment (See box below) is the single biggest enabler of Pactiv’s ongoing success. The management process aligns strategy with execution, maintaining the connections between goals and projects—between what has to be done and why it has to be done—from high-level financial objectives down to daily production targets.

This past August, Pactiv’s leadership team completed the latest round of its “Level 1” strategy deployment meetings. Facilitated by TBM Executive Vice President Dan Sullivan, the exercise started with SWOT analysis (internal strengths and weaknesses, and external opportunities and threats). The team then looked at the company’s three- to five-year objectives for revenue, EBITDA, working capital and safety.

“ We want 80 percent of the solution today as opposed to 100 percent of the solution a week from now.”

— John McGrath CEO and President, Pactiv

Policy Deployment at PactivPolicy deployment (also known as strategy deployment and hoshin planning) helps leadership teams establish annual improvement priorities (AIPs) and key performance indicators (KPIs) at every level of the business. Monthly reviews of performance maintain focus and prompt fast corrective action when any area falls behind. The approach forces leaders — and the organization as a whole — to focus on a small number of initiatives that will make the biggest impact on growth and profitability.

Level I – Executive TeamLevel II – Value Streams (8)Level III – Finance, HR, EngineeringLevel IV – Manufacturing Plants, Warehouses, Sales Teams

Cascaded Elements• Market SWOT Analysis• 3- to 5-year Objectives › Revenues › EBITDA › Working Capital › Safety• Annual Improvement Priorities (AIPs)• Bottom-up Plan Development• Workbooks – Project Status• Monthly Reviews & Countermeasures

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LEADERSHIP

(continued from page 7)

“ When people understand why you’re doing something, even though they may not like it, they’ll get it done.”

—John McGrath, Pactiv

Pactiv manufactures a wide range of foodservice packaging, including hinged plastic containers for multiple applications.

The work at this level is guided by the Pactiv Business System, which includes a highly structured approach to continuous improvement, starting with a strong emphasis on safety.

As part of the policy deployment process, business managers track and report progress in workbooks. The workbooks mostly contain “bowler charts”—so-called because of their resemblance to a bowling score sheet—showing the plan vs. actual status for every month. Each initiative is rated as green (on target) or red (off target).

Management reviews focus on the countermeasures necessary to move anything that happens to be red for a particular month to green.

A Strong Bias for Action

Since he became CEO in November 2010, McGrath has reinvigorated Pactiv’s focus on talent management. He dedicates four days every year to succession planning several layers down in the organization. Business managers with the highest potential are invited to participate on a Leadership Advisory Council.

The company’s leadership team sets aside two days every quarter to meet with this council, giving members an opportunity to get to know and learn from the experiences of senior Pactiv leaders. The council also

works on projects that are central to the growth of the corporation. Recent initiatives included designing a more structured and effective on-boarding process that better reflects the investments the company makes in recruiting top talent. They also redesigned the company’s website, and codified the set of core values that now define the company’s culture.

When asked about the type of managers who succeed at Pactiv, McGrath repeatedly brings up speed and the ability to get things done. “We recruit aggressively for people who have in their background some notion of continuous improvement, and who have demonstrated the ability to work at a pretty fast pace. We want 80 percent of the solution today as opposed to 100 percent of the solution a week from now,” he says.

“We don’t want people making bad decisions. We don’t want rash responses to opportunities, but we don’t want people to over-analyze things. We take a significant amount of risk and have a tolerance for mistakes. We don’t have a high tolerance for inaction,” McGrath emphasizes.

McGrath makes a point of going to where the action is. He is out visiting the company’s plants almost every week. Plans that look good on paper or on white boards in the corporate office may be fine in theory, he says, but they won’t work if they’re not communicated or if people don’t really understand what the company is trying to do.

“This is a contact sport. You can’t do it from the office. You’ve got to get out and touch the people who are making it happen,” he concludes. “If it weren’t for the 12,000 employees who work in our factories and work in warehouses, we wouldn’t have a company. We wouldn’t be making anything, and we wouldn’t have any customers.”

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STRATEGY

Why Critical Thinking Is

When was the last time you gave some thought to thinking? Usually, this is not on a leader’s list of daily priorities, but it should be.

Decision-making is a primary job function of organizational leaders, and most of them believe that when making decisions, they are being fair, impartial, and inclusive of data and other evidence. Indeed, they might even believe that they are leaders because of their track record of making good decisions.

Humans are hard-wired with poor decision-making tendencies that can perpetuate organizational problems. Using a critical-thinking method ensures leaders and others make good choices based on facts and evidence.

(continued on page 10)

Critical

By BETh MORRISOn, TBM SEnIOR MAnAGEMEnT COnSuLTAnT

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What they don’t realize is that humans are hard-wired to do the exact opposite—make decisions based on experience and intuition, a proclivity that can cause bad decision-making in business. Not only do bad decisions immediately introduce new problems, but they also cause stagnation, i.e., problems persisting instead of being corrected.

The solution is to establish a methodology to ensure critical thinking is taking place at multiple levels of the organization.

What does this mean for decision-makers?

Brain Evolution and Decisions

As humans evolved, our brain came to recognize inputs and act upon them appropriately. Rapid decision-making resulted and was one of the things that led to survival of the species. Faced with a predator, an

early human didn’t debate the odds of being able to run faster than the threat; his body simply gave him a jolt of adrenaline, and he jumped to an immediate conclusion: RUN! When he survived, he formed a belief: I must run away from that situation. Jumping to conclusions—more politely referred to as intuition—is still how most of us make decisions, even though we believe we are using logic and information.

In decision-making, this process requires that leaders:

Consider all of the facts that you are assuming or that you think are true. Many “facts” may be constructs of the imagination or things that we believe are facts even though we have never tested them. You need to have a basic understanding of probability, i.e., how likely is it that one of your facts or beliefs is true, especially if you haven’t tested the fact or don’t have a lot of impartial data.

Examine your logic. Are you assuming causation when there is just correlation? When A and B always seem to happen together, are you assuming that A results in B happening, when in fact it may be C that makes both A and B occur together? Although humans use logic, we are prone to a lot of logical fallacies.

Examine your motivations. Have you reached your conclusion because you truly used the facts, or because you used information that you wished were true? Could you have come to this conclusion to avoid looking inconsistent in relation to prior decisions that you have made, or positions that you have taken?

Check your decision with others (without trying to rationalize your decision). If you check your facts and data, and present them to others, will they reach the same decision as you? Decisions made by individuals can be based on the quirks of the decision-maker.

Be humble. Start by admitting (if only to yourself) that your conclusion could be wrong. Ask yourself: If I knew X, would I make a different decision? Then figure out how to get information regarding X.

First, they must acknowledge that by nature, they are prone to weakness in the thought process. In addition, they must realize that critical thinking skills are just that—skills, something that must be learned and practiced. Critical thinking is a process with steps that can be followed (like any other process) to help you achieve competency through practice.

STRATEGY

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As a result of the value of intuition, we became hard-wired into developing beliefs. Once we form beliefs, we rationalize them. This means that data or evidence (even anecdotes) that support our position strongly resonate, while we find opposing evidence flawed or weak. Psychological researchers have demonstrated a positive relationship between intelligence and rationalization, which means that highly intelligent people may not be better than others at making decisions, but they are markedly better at rationalizing the decisions that they have made. This also means that they are much more likely than others to discount or trivialize new data that might lead them to a different decision.

Kaizen: Decision-Making Lower in the Organization

Organizations that use the kaizen team process already have an established process of critical thinking that is practiced live during the kaizen week. The kaizen improvement process closely mirrors critical thinking, and kaizen teams regularly come up with good (and inexpensive) solutions to problems.

Building a Culture of Critical Thinkers

In addition to the solid improvements that kaizen events instill, they are also an excellent method to train everyone in an organization on critical-thinking skills.

The kaizen process helps team members develop a healthy skepticism of current decision-making processes in the organization. They have seen how collecting data and experimenting are key to identifying the right solution. Now, they are equipped to be part of the culture change within the

Consider these attributes:

Alignment on Problem and SolutionIn a kaizen event, the team has been given an objective (improve productivity, reduce downtime, etc.), but they have not been told how to get to that objective. Therefore, the team has a common problem. A kaizen tenet is that everyone on the team is aware of the objective and knows that the objective is their focus for the week; and they know that they are going to be developing, not just implementing, a solution.

Data and Facts During a day of discovery, the team makes observations and develops data and information by measuring. Because multiple people are making and discussing the observations, it is unlikely that the individual biases of the team’s members would all be the same; so as the data is uncovered, there is usually a general consensus of what data is good to use. It satisfies no agenda other than being necessary to achieve the objective of the event. Therefore, the team is using facts and data.

Testing and Refinement When the team develops solutions that will help move toward the objective, they often have to test the solutions, refine what they have done, and test again. This continues to reinforce making decisions based on facts instead of what they think (or wish) might work as a solution. Because they are developing the solution “live” and refining the solution based on current observations, the team is not prone to the problems of memory that would make some solutions look more attractive than others.

Checks and Balances The team acts as its own sanity check. No one person on the team is analyzing all the information and then telling the team what has to be done. Instead, there is a lot of back and forth and consensus during the process.

What can we learn from the kaizen process as it relates to critical thinking?

organization and will want to make decisions by obtaining current facts and data; and testing solutions and refining those solutions prior to proclaiming success.

How many of the leaders and decision-makers in your organization have participated on a kaizen team? It can be a challenge but it is worth it for those whose ability to make the right decision quickly and independently influences organizational success.

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