Accurate Forecasting

Why can’t we get a more accurate forecast from sales?
Manufacturing managers the world over have the same complaint.

Maybe the word “forecast” is tripping everyone up.

A forecast is a prediction. Maybe it is based on some kind of market analysis, maybe even asking the dealers what they think they will sell. It could be based on a lot of things.

Once a forecast is complete, it is regarded as the best guess for how things will pan out, but those things are (felt to be) largely beyond our influence.

We forecast weather. How many hurricanes will we have this season? Will it rain on the outdoor wedding? Tides are forecast (accurately, but we can’t change them).

A competitor’s sales might be forecast, because we really don’t know their plan.

A sales forecast gets put together, approved, agreed, and entered into the data system.

Then two things happen.

Manufacturing bets the farm on it. They order long-lead parts, establish production plans, set factory capacity. They decide, based on that forecast, how much money is going to be spent, whether anything is actually sold or not. Those decisions often have to be made months in advance.

Meanwhile, all too often, sales has forgotten about the forecast, except perhaps, the top line sales figures. They work hard to sell whatever they can. They push for the big order. They offer the world to prospective customers. They will offer discounts, then push for higher unit volumes to close the dollar targets. Many times they operate on a quarterly (or worse) cycle.. as long as they have a great June, then April and May don’t matter so much.

Meanwhile, back in the factory, when April and May have been dry, they get slammed on June 4th, and end up expediting in parts (at great expense), and working overtime (at great cost), to make product that was sold at a discount.

This is no way to make money.

Let’s get back to what I think is the original issue – the word “forecast” meaning “prediction” (or “educated guess”).

Let’s change one word.
Sales Forecast Plan

That changes the entire meaning.

A “forecast” is a prediction of some event we have little or no control over.

A “plan,” on the other hand, is a set of actions which, if carried out as intended, are predicted to give a specific result. This is a different kind of prediction. This is the kind of prediction that an engineer makes. She analyzes her design, applies her considerable understanding of materials, structure, load transfers, then she predicts at what point that design will fail. If it is a brand new design, it is often tested to destruction (like a new airplane wing). This isn’t to test the design so much as to validate the models used for the prediction.

Sales isn’t engineering, I know that. It involves the most complex thing we know about – human psychology.

The sale planning process goes roughly like this:

  • Financial, margin, volume targets to hit the higher level strategy for profit and growth.
  • What must be sold, when, where to hit those targets. There may be more than one set of options.
  • What must be done to achieve those numbers. This includes consideration for:
    • Unit volumes and mix. (Which are really the only thing the factory cares about.)
    • Total profit targets.
    • The margins that have to be held to hit those profits, at those volume and mixes. (Yes, sales is responsible for margins and profit.. how much money the company can actually keep, not just top line results. “We’ll sell it at a loss and make it up in volume” is not a long-term strategy to stay in business.)
  • Then a process of looking realistically at what must be done, what can be done, deciding on a course of action, and producing a detailed plan to carry it out.

That sales plan then plugs into a production plan. Where there are planned fluctuations, we can apply planned levels of buffer inventory – FIFO inventory, not just make-to-stock inventory, to allow a small time disconnect between when it is made and when it is shipped. This is part of heijunka. (This works in both make-to-order and make-to-stock models, only the mechanics differ.)

Now the entire organization can carry out PDCA.
Are the activities in the sales plan being carried out, as planned, when planned?
If not, why not?
Are they producing the results that were intended predicted? (One-by-one confirmation.) No? OK, what have we learned that we can apply to making a better prediction next time? AND, most critically, What else are we doing to do, because we still have to hit the numbers!

And hit the numbers we must. Not by the end of the quarter. By the end of the month to start. Then in two week increments. Then in one week increments. (And all of this assumes you are making and selling something that doesn’t spoil if it is sitting on the lot for a week.)

The sales plan is the production plan for sales. It is not a guess at how well they will do Just like the manufacturing production plan, it is a firm commitment on how they will support the organization’s overall goals. Yes, reality intrudes and plans rarely get carried off exactly as written. But the thinking that went into making the plan, and the commitment to deliver the results, means the organization, as a whole, is prepared to deal with the unexpected and still stay on track.

Is this idealistic? Absolutely. It is pursuit of perfection. But until the thinking is in place, we will be stuck where we are… waiting for something outside of our control and hoping.

The Value of People

How can some companies not only survive, but thrive when operating in “high cost labor” areas, while others are struggling even as they are busy chasing the lowest possible costs?

I would like to suggest that one key difference is the attitude toward people. On the one hand is the “people as cost” model. This model usually has a couple of built-in assumptions.

  • The number of people required to do a particular task is fixed, often against some kind of earned-hours standard.
  • The cost driver is wages, salaries and benefits.

On the other hand is the (seemingly) rare organization that truly believes that people are their strength, or the well worn out “our greatest asset.”

The assumptions which are required for this belief are:

  1. People’s net productivity can always be improved.
  2. The cost driver is the amount of time wasted coping with all of the small problems that keep things from going perfectly.

The above assumptions, of course, are anchored in a faith-based position that perfection is possible. (see “Chatter as Signal“)

So… what kinds of actions to each of these two models drive?

The first one – people are cost – says to find the cheapest possible labor and hire it. Since factory wages in China are (right now) running about 1/12 or less of those in the USA or Europe, that seems a logical choice. Here’s the rub.

You can outsource the entire job to another company – give the work to the lowest bidder. Now, if you truly believe that the amount of labor is fixed, and that only lower wages can change cost, then this is the obvious choice. You are relying on your superior supply chain management system to ensure you select a supplier that can maintain, and maybe even improve, the quality they deliver, plus hold the line against increases in materials, energy, and their own labor costs. In short, you are looking for a supplier who believes the opposite of what you do. Your ideal supplier knows they can bid aggressively, get your work, and then improve their profit position by applying continuous improvement.

Or you can export the production and set up your own operation in a “low wage area.” You are shifting your core beliefs about people to another culture, and another language. Communication (believe me!!) is a major issue, even if the managers work for you.

AND.. if “labor is cheap” then the solution to problems is to throw people at them. The cost differential you actually get almost NEVER reaches the advantage of a 1:1 substitution. Oh – and you just added 3-4 weeks to your lead / response times.

If, on the other hand, you take the attitude that the most precious resource in your operation is people’s time – no matter what you pay them, and take the attitude that to deliberately waste anyone’s time is to show great disrespect, then I would suggest that even in high-wage areas you can drive levels of improvement in productivity, quality and response to your customers that would be difficult to beat anywhere.

So – before you reflexively outsource or relocate to a “low wage area” please check your attitude about people. What are your expectations, and why is it that you don’t believe your own people are capable of delivering a 10x improvement?

Who are your competitors? What do they do?
What would you do if you had to compete with Toyota? or Komatsu? (to name two that come to mind) They are building product in your back yard, why can’t you?

Afterthought: Some companies end up outsourcing the skills they need to improve their own products and systems. They no longer understand the technology they sell, they no longer know how to make what they sell. I remember a time when I reminded an (arrogant) procurement executive that it was possible to outsource the entire procurement process just as easily. Another team had outsourced all of their direct labor management… they contracted the labor and the first level supervisors into their factory. Where did they really believe this was leading?

Chatter in an ISO Process

I have been in, or encountered, a number of organizations which had (or were working on) ISO-900x quality registrations. While I am fully aware of the intent of the ISO requirements, in the cases I have seen, the effect seems to fall well short of the goal.

On the surface, the types of processes mandated by ISO 9001 seem quite reasonable. They require knowing what your processes are, having documentation for them, and having systems that address problems to root cause.

The requirements are not a lot different from what I mentioned a couple of posts ago in Chatter as Signal. The example of the U.S. Navy’s nuclear propulsion operations would certainly meet the criteria (and then some).

So the question is:
What is fundamentally different about an organization with a “paper only” ISO certification that struggles with chaos every day vs. one which is truly process driven (whether they have an ISO certification or not)?

Chatter as noise.
Chatter as signal.

Chatter as Signal

As I promised, I am going to continue to over-play the afternoon my team spent with Steven Spear.

In his forthcoming book “Chasing the Rabbit” (to be published in the fall), he profiles what is different about those companies which seem to easily be increasing their lead against competitors when there is no apparent external advantage.

One of the core concepts he discussed was the nature of complexity in organizations, processes and products. It is the way this complexity is managed and handled that distinguishes the leaders from the pack of competitors that are fighting and jostling for second place.

In a complex system, there are invariably things people miss. Something is not defined, is ambiguous, or just plain wrong. These little things cause imperfection in the way people do things. They encounter these unexpected issues, and have to resolve them to get the job done.

This is “chatter” in Spear’s words. The sound made when imperfect parts try to mesh together.

Most organizations accept that they cannot possibly think of everything, that some degree of chatter is going to occur, and that people on the spot are paid to deal with it. That is, after all, their job. And the ones that are good at dealing with it are usually the ones who are spotlighted as the star performers.

The underlying assumptions here are:

  • Our processes and systems are complex.
  • We can’t possibly think of and plan for anything that might go wrong.
  • It is not realistic to expect perfection.
  • “Chatter is noise” and an inevitable part of the way things are in our business.

On the other hand, the organizations that are pulling further and further ahead take a different view.
Their underlying assumptions start out the same, then take a significant turn.

  • Our processes and systems are complex.
  • We can’t possibly think of and plan for anything that might go wrong.
  • But we believe perfection is possible.
  • Chatter is signal” and it tells us where we need to address something we missed.

We have all heard about Toyota’s jidoka and andon processes, so let me bring out another example, again, that was used by Spear.

The U.S. Navy has been operating nuclear reactors with a 100% (reactor) safety record for nearly (over?) 50 years. And they operate a lot of nuclear reactors. When they started, they were in totally new and unfamiliar territory – they were doing things that had never been done before. In fact, no one was even sure if it was possible.

They asked the question: How should this nuclear reactor be operated? They answered it with a set of incredibly specific procedures which everyone was expected to follow – exactly, without deviation in any way. These procedures represent the body of experience and knowledge of the U.S. Navy for operating nuclear reactors.

Here is the key point: ANYONE who departs from the procedure, in any way, no matter how trivial or minor, must report “an incident” which rockets up the chain of command. The reasons for the departure are understood. If there was something outside the scope of the procedure, the new procedure covers it. If something was unclear, it is clarified.

This may not be the Toyota Production System at work, but it is a version of something that makes it work: Jidoka.

If the process is not working, can not work, or conditions are not exactly as specified for the process to succeed, then STOP the process, understand the condition, correct it, restore the system to safe, quality operation, and address the reason it was necessary to do this.

Chatter is signal.

So – at a Toyota assembly line in Japan some years ago, I observed a Team Member drop a bolt. He pulled the andon cord and signaled a problem.

Assessing Results vs. Reflection

As we near the end of 2007, most of our respective organizations are looking at what we are going to do in 2008.

Part of that is usually to take a look at this year and look at where we are right now. There are a couple of ways to go about this, and I want to contrast them. This is based only on my own personal experience and, of course, your mileage will vary.

All too often I think this process consists of reviewing results vs. goals. The emphasis is almost solely on targets and actuals. The target was hit or not hit. Top leaders are not interested in “excuses.” I have seen particularly destructive forms of this that included going so far as to re-define success to match what had been achieved. The baseline was re-set at the beginning of the next year, and everything in the past forgotten. Managers took full credit for cost reductions which were “achieved,” not through their own actions, but due to fluctuations in commodity prices of raw materials. Likewise, managers were assigned blame for not hitting targets for the same reason if those prices went up.

There was no review of progress of activities which were predicted to achieve specific results, nor was there a prediction that specific activities would lead to specific results. Instead there was a general high-level target, then a list of actions. Since none of those actions was tied to a verifiable outcome or target, there was no way to know what worked and what didn’t.

Even worse, it really didn’t matter. As long as the targets were achieved, that was what counted. There were great negotiations about exactly how targets would be measured (this company measures everything, and measures nothing). Then, for example, if inventory reductions were to be achieved over the year the actions taken were: (1) Shut down production processes to starve the system. (2) Pull 1Q orders in to 4Q to book the sales. Ships were loaded and sent early because the inventory cleared from the books – even though this was intra-company shipment. They had a LIFO system, so the deeper they could reach into inventory for sales the higher profit they could make since the older the inventory the “lower the cost” associated with it.

All of these games were driven by a “hit the targets and don’t ask about how” mentality. By the way, when 1Q results rolled around things were dismal because they had pulled orders forward PLUS starved the system by shutting down production in 4Q.

This management system is designed intended to deliver results to Wall Street, though it really doesn’t Such is the corrosive nature of trying to manage to “shareholder value” using traditional cost accounting methods. Yes, shareholder value is important, but you can’t manage to it and expect to get the kinds of results that customer and processed focused companies do.


Reflection is a learning process. It is designed to incorporate what was learned into shifts in approach for the future. Without it, learning is, at best, an individual action. At worst, the learning is how to survive in the system, not how to do better.

The three key questions are:

  1. What did we intend or plan to accomplish?
  2. What was actually accomplished?
  3. Why the difference?

At a deeper level:

  • Did you accomplished the actions you intended to accomplish? If so, how did that go? What obstacles did you have to overcome? If not, what got in your way that you could not clear?
  • Did each of those actions deliver the expected or planned result? Are you sure? It is just as important to understand why you succeeded as it is to understand why you failed. The commodity price example above is an example of the opposite. They succeeded, but didn’t acknowledge that it wasn’t through anything they did or didn’t do. If an action did not deliver the anticipated result, why not? What did you learn?

Planned? Actual? Please explain.

This is nothing more than the application of PDCA and the Scientific Method. Your plan for the year consisted of a designed experiment. “If we do these things, we expect this results.” Then do that thing, and check that you actually did it. Compare your actual result with the expected result. Explain any difference. Learn.

Adapt, Evolve

I encountered a new level of sophistication in comment spam engines today. This one actually hosts a “blog” of its own. The engine parses quotes from other blogs, posts them as comments in those blogs and links back to itself. On its host site, it looks like a “blog” but, in reality, it is nothing more than a link farm and host for Google ads.

I wrote a note to Google regarding a possible policy violation. In reality, I suppose I wouldn’t mind so much if it just posted things on its own site, but to make me deal with it, and have Google financing it, was a little much.

In an odd ironic twist, the spam filters are the dumb, but automated guardians and the spambots’ algorithms are created by clever people. In this war, people still win pretty much every time.

I suppose I can tie this back to my topic:

In spite of what some would want to believe, the Toyota Production System is not about blind execution of algorithmic standards. It is about continuous evaluation of those standards against a standard of perfection. It is shaped by people, but in ways which are unpredictable except in the macro sense.

As conditions change, the system adapts. As things break, it fixes itself. But all of this only happens if the organization actively works, every day, to ensure that people’s minds are fully engaged doing the right things, the right way.

Training – Critical Questions To Ask

There is lots of “Lean Training” out there, and the quality ranges across the board.

“Lean training” is a megabucks business, and anyone who can assemble a pack of PowerPoint slides and a web site is offering “lean training” out there. It is certainly a case for buyer-beware. So how do you evaluate all of the alternatives, especially if you are just learning and might not be in a position to judge? (Irony: If you are in a position to critically judge these training programs, you probably don’t need them.)

What is being taught and how?
In my experience, most people will readily agree that the tools and artifacts usually associated with the Toyota Production System or Lean Manufacturing are not the system itself. Rather, it is critical for people (and especially leaders at all levels) to understand the thinking behind the tools and artifacts.

The way Toyota teaches the thinking in their new plants is through structured experience. Key leaders are assigned coordinators as mentors. Leaders are taken to established plants to immerse into the system itself. The mentoring continues as the new plant is brought on-line. The process is long, resource intense and expensive. As a result the people who were trained this way are highly sought after in industry. (Another story for the future sometime.) Steven Spear’s article, “Learning to Lead at Toyota” does a great job giving the reader a feel for how this is done. The learning process is entirely experiential.

On the other hand, “talking head lecture” and PowerPoint slides are probably the least effective way to teach this stuff. Even with a couple of simulations with toy trucks or Legos, a classroom-only exercise is only going to get the general concepts across.

If you accept that the real learning comes from guided experience, then it follows to ask if the time spent in the classroom reduces the time required for experiential learning by at least as much. If a week in the classroom (plus the travel time, etc. away from the job) does not return at least two weeks of reduction in the hands-on learning, then it isn’t worth it… no matter how “feel good” it is.

What is the emphasis on direct observation of actual problems? One of the core skills for leaders to learn is how to see problems. If you ask “How much time is spent to watch and understand the work?” the answer you get will tell you a great deal about how well the trainer actually understands the TPS. A high-pressure “kaizen event” especially one which emphasizes just-do-something over first understanding the actual situation – is going to teach exactly the wrong things. Action without understanding results in chaos.

How much of the training involves making actual improvements to actual work? The more the better, but only in the context above.

The classic 5 day kaizen event was originally an educational exercise, and it works very well for this if it is planned and led with learning in mind.

What is the reputation of the teachers? Disregard client testimonials. Ask to speak to some long-term customers. I say long-term because in the initial stages of lean implementation things are pretty easy. A typical medium-sized factory, for example, can get most of the mechanics into place over a few months with aggressive leadership. But if the teachers do not understand (or understand and do not teach) the leadership how to detect, escalate and solve the thousands of problems that will inevitably be flushed to the surface, the implementation cannot sustain for long.

Recognize Reality: The only way to really lean this stuff is to through experience. And not just any experience. Just being told how to implement kanban, fill out the standard work forms, take cycle times, etc. is not learning the things you must know to sustain your gains and build on the initial momentum.

The critical skill – the one that (so far) is only learned through mentored experience – is how to direct actions through guidance and teaching vs. just telling people what to do or how to do it.

What Is Your Takt Time?

If you are the “lean manufacturing expert” you probably know. But what answer do you get if you ask the question in the work area?

Here is a quick diagnostic for you: Go to the shop floor and ask a supervisor, “What is your takt time?”

A reply of “Huh?” is pretty self-explanatory. Either the entire concept hasn’t reached this area yet, or if it has, the day to day variation and disruption renders the concept moot. A couple of follow-up questions can quickly discriminate.

A common reply is the daily output number (e.g. “14 units a day”). Although this shows understanding of a daily production requirement, “14 units a day” does not necessarily translate to “7 units before lunch” much less “a unit every 30 minutes.” This Team Member is still thinking in terms of total output, even if every unit has to be reworked in the last hour of the day. Obviously this is better than reworking every unit in the last week of the month though.

I have also had Team Members do the calculation in their head. They know how to calculate takt time, but don’t use it. This is pretty common when takt time is something that is only a factor during formal kaizen “events” that are run by someone other than the supervisor. I would imagine that standard work is also something that is a “kaizen event thing” rather than daily management as well.

Ideally though, anyone on your shop floor has the takt time embedded in their thinking. If the immediate reply is “28 minutes” then the follow-up question is “how are you doing?” At this point, you can begin exploring how well they use the takt time to manage variation and problems.

What is your takt time?

Getting A Plant Tour

A couple of days ago I wrote about how to host a tour. Here are some thoughts on how to get one. As always, I’d love to hear your comments and experiences.

Don’t expect your hosts to change your “cement heads.” I have had requests from groups who wanted to send their “resistant managers” to our factory so we can show them things that will change their minds. Doesn’t work. Sorry, that is your job. My experience is that people who don’t want to see the benefits will always find all of the things that are “unique” about their circumstance, and special case reasons why the other place is doing so much better.

Go to learn, not to look. In my last post I made reference to “industrial tourists.” Those are groups that are more interested in the layout and clever gizmos than in the thinking behind them. They are, at best, looking for ideas and technical solutions to their problems. Copying others’ solutions is not thinking.

Going to learn is a different attitude. When you look at a layout, or other technical solution, ask yourself this: “What problem does that solve?” How does it save time? How does it remove variation from the process? What did the operation look like before they did that? Force yourself to think in four dimensions. Not just what you see now, but what it would have looked like in the past. WHY did they do this?

Although many people think lean manufacturing is counter-intuitive, I think that with this line of thinking you will find it actually is just common-sense solutions to the problems that everyone has, every day.

Nobody is perfect. Even a Toyota plant has obvious issues. If you end up fault-finding, you will miss the good stuff. I was touring a Toyota plant with a group a couple of years ago and it had obviously slipped. This is old news, and one of the reasons for their internal back-to-basics approach. But two things came to light: The rich visual controls made it easy for total strangers on the 1 hour tour to SEE the difference between “what should be” and “what is.” Wow. Try that in YOUR factory. And, reading the news stories, it was a problem they were taking very seriously and doing something about it vs. not noticing the deterioration and just letting things go.

Every plant has issues. Some have great material flow and pull systems, but only average problem solving. Others have a great technical base for home-grown tools, fixtures and machines. A few have great problem solving (They seem to be doing better than others.) Take in what is working, and what is holding them back. What would be the next problem they are working on?

Pay attention to the people. People are the system. How do they interact with the physical artifacts (layout, machines, etc.) An operation that has their stuff together will have people who are obviously comfortable with the pace of work. It will be obvious they get support when there are problems.

Don’t ask too many questions. What? Aren’t you there to learn? Yes. But try to learn with your eyes first. Even if you are moving, “stand in the chalk circle” and see the problems and the solutions. Sharpen your observation skills before you take the tour. Practice in your own plant. When I am hosting visitors and we have the time, my response to a question is to show them where to look for their answer, then ask them what they saw.

If allowed, make sketches. Most operations will have a prohibition against photographs. Even if they allow photos, however, you will capture much more if you stand and sketch what you see. You don’t have to produce a work of art. The purpose is to force your eye to pay attention to the small details. You will see much more through the eyes of the artist than you will through a camera.

Remember they are in the business of production, not consulting.
“Be a good guest” and remember that everybody there has a real job.

Edit 5 Sept: And Jon Miller correctly pointed out something I missed:

Give Back. You will bring “fresh eyes” to their environment and see things they do not. Everyone suffers from a degree of blindness to the familiar. If you are really going to see and learn, you will gain insights that can help your hosts in their own improvements. Ask them the questions that will help them see what you see.

Giving A Plant Tour

When one of my operations at “a previous company” started to really show some results, they began to get a lot of requests for tours from other groups. Obviously they are not in the business of giving tours, and these requests were beginning to impact on their time. Here are some guidelines I gave them based on my experience at the previous, previous company. 😉

Separate the groups who are really interested in learning from the “industrial tourists.” This is easy to do. At the first email or phone contact simply ask them “What do you want to learn about?” People who are serious about learning will have something specific. If they say “Everything” you probably have industrial tourists – a group that wants to see, but not study.

Develop a standard 1 hour tour with a script and teach all of your supervisors to give it. When industrial tourists show up, give them the 1 hour tour send them on their way, and they will leave happy and excited.

What about the others? The ones who aren’t industrial tourists?

Turn them over to your very best kaizen leader. Spend as much time with them as you possibly can. Customize the time to meet their learning objectives. Confirm what you plan to do with them, and verify that is likely to work for them. While they are there, check continuously. Make sure all of their questions are answered, even the ones you had wished they didn’t ask. Better yet, show them what chalk circle to stand in so they can see the answers for themselves.

Why do all of this? Because these are people who are trying to learn, just like you. Your leaders have everything to gain through interacting with a truly curious group. They will ask questions you haven’t thought of. They will see things that, due to your daily familiarity, you have overlooked. And most importantly, you will work to build the community and extend the spirit of learning to one more organization.

Hopefully they will remember the experience and do the same thing when someone asks to come and study them.