The Process-Based Organization: A Natural Organization Strategy

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Page i The Process-Based Organization A Natural Organization Strategy Gustavo Crosetto Jorge Macazaga

The Process-based Organization : A Natural Organization Strategy Crosetto, Gustavo.; Macazaga, Jorge. HRD Press 0874258375 9780874258370 9781423716839 English Organizational change, Organizational effectiveness, Corporate culture, Personnel management, Teams in the workplace. 2005 HD58.8.C76 2005eb 658.406 Organizational change, Organizational effectiveness, Corporate culture, Personnel management, Teams in the workplace. cover

page_i Page ii Copyright © 2005, Jorge A. Macazaga and Gustavo J. Crosetto All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or use in an information storage or retrieval system, without prior written permission from the authors. Published by: HRD Press 22 Amherst Road Amherst, MA 01002-9709 800-822-2801 (U.S. and Canada) 413-253-3488 413-253-3490 (Fax) www.hrdpress.com ISBN 0-87425-837-5 Editorial services by Sally Farnham Typeset by Wordstop, Madras, India Cover design by Eileen Klockars page_ii Page iii Contents List of Figures Introduction 1. The Traditional Organization Reengineering: A Confusing Word A Cell Is Not a Business Unit The World of Possibilities in the Process-Based Organization The First Steps Starting the Race Factory Aligned with Clients Finances Aligned with Clients Administration Aligned with Clients Human Resources Aligned with Clients Considering Teams 2. Preparing the Road for Change Defining the Strategy Tactics and Strategy

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Restrictions on Total Quality Defining the Difference Efficiency in Short Production Series A Simple but Deep Vision Starting the Communication Plan Now Everything Is Subject to Scrutiny Speed and Efficiency: Two Sides of the Coin The Airline Story The Textile Company Strategy Page iv

The Automotive Parts Company Strategy Two Sides of the Coin Time: The Driver of Continuous Improvement Process-Based Organization in the Service Business Process-Based Organization and the Health Care Industry Process-Based Organization in Government 3. Redesigning the Factory World-Class Manufacturing Cellular Technology Systems of Cellular Incentives Flexibility and Setup How to Reduce Stocks of Finished Goods Push and Pull A New Production Synchrony

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Criteria for Incorporating Technology in the Cell Virtual Cells Kanban and MRP Kanban: A Supermarket Kanban and Setup: A Close Relationship Kanban and Bottleneck Management Bottleneck Management: An Aspirin for the Comatose Clever Output Manufacturing: PostReengineering Planning System Finite Scheduling Electronic Kanban Kanban of Raw Material and Finished Goods The Decentralized Factory Focused Warehouses Partnerships with Suppliers: How to Start PM — Preventive Maintenance Factory Automation Manufacturing Technology Cell Automation: A Technological Solution for Today Computer Systems Technology

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Page v 4. Process-Based Organization Initial Communications The ProcessBased Organization How a ProcessBased Organization Optimizes its ERP Systems

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How to Create a Corporate Sense in the Organization Disintermediation Business to Consumer (B to C): Speed First CRM, Call Centers: How to Profit from Them Process-Based Organization in Service-Oriented Businesses The Measure of Success for Business Managers ABC (ActivityBased Costing) and the ProcessBased Organization Cell Synchronization Personal and Professional Development in the ProcessBased Organization The Function of the Chief Executive in a Cellular Structure Orderly Expansion in the Cellular Organization Teleworking and Work Cells 5. Designing the Logistics Department World-Class Logistics The Elimination of "Distribution Centers" The CustomerDriven Organization Kanban in the Distribution Chain Cells in Warehouses Business to Business (B to B): Don't Place the Cart before the Horse

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Internet + Speed: The Combination for No-Intermediary Systems 6. Implementing Changes at the Factory Changes in the Factory Small Steps

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Initial Benefits From a SectionBased Factory to a Process-Based Factory Continuous Improvement in the Cell The Human Aspects of the Change Toward an "Intelligent" Organization The First Cell in the Factory The New Role of the Quality and Maintenance Department Ensuring Success from the Start Reformulation of Information Systems 7. Change in the Administration and Commercial Departments A New Approach Cellular Organization and Information Systems An Example of Functions within the Cells Activity-Based Costing and Cellular Organization: A Simpler Way Sharing Changes with the Rest of the Organization A True TeamBased Organization

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The Chess Board of the New Organization: Selection of the Cell Managers A Business Made up of MiniBusinesses: Tangible Benefits Logistics through Kanban Clever Output Manufacturing: A Step Beyond MRP and Bottleneck Management A New Look at Investments Process-Driven Information Systems 8. The Human Factor Mental Blocks in People Communication: A Vital Piece Loss of the Traditional Power Training and Leadership Development Motivational Myopia and Negative Emotions Page vii

Leadership with a Sense for Emotions Mistakes that Cannot Be Accepted Fairness in Labor Management The Self-Evolving Organization Advanced SocioTechnical Systems "Virtual" Cells Human Development in the Self-Evolving Organization 9. The Future

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The Most Difficult Thing to Understand is the Human Heart, and It's the Most Valuable Cell Organization Applied to All Business Types Future Relationships Between Cellular and Information Technology Education with an Eye on Process A Future with Cells and Team Emotion 10. Let's Say It Again with Feeling! About the Authors

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Page ix List of Figures 1. Process Reengineering Across Functions 2. Problems with the Traditional Change Process 3. Cell/Soccer Team Analogy 4. From Traditional Business to Cells 5. Cell Design 6. The Process-Based Organization 7. Set-up Reduction: Efficiency and Lead Time 8. Push vs. Pull Model 9. Kanban of Raw Materials 10. Kanban of Final Products 11. Functional Cell Configuration in a Consumer-Goods Enterprise 12. The Administration Cell 13. Cell Information Exchange 14. Evolution in the Cellular Organization 15. Kanban of the Logistical Network 16. Production Cells: Quality and Efficiency 17. Model of Team Emotion Dynamics page_ix Page x

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Page xi Introduction Technology applications have evolved at neck-breaking speeds in the last twenty years, but can the same rate of progress continue, given outmoded management and organizational structures engrained in today's corporate business functions? How can organizations prepare themselves for the quantum leap in social and technical innovation expected in the next twenty years? This book presents a natural approach to organizing and explains how process-based organizations and human emotional dynamics, although difficult to put into practice given the current state of management and leadership competence, are the next frontier to conquer in the race to achieve competitive advantages and the promise of a new era in a global economy. While much emphasis has been placed on the management of technology, the two remaining elements of the tripartite formula for organizational success, processes and people, have lagged behind in their development. Technology by itself, the most alluring of the three, is rapidly moving the success formula to its limit. Some approaches to organization and process redesign have been tried in the past with limited success. These approaches include business processes reengineering, technology/ Internet enabled communications, faster information transfer, and new ways of looking at the human aspects of leadership and change management. However, none of these approaches independently taken address the need to refocus the emotional energies and resources of the organization. New and less-mechanistic ways of organizing are needed to overcome the unproductive hyperactivity that afflicts companies nowadays: a hyperactivity that results from the indiscriminate injection of technology to outmoded processes page_xi Page xii and managerial and organizational structures. Without a total organization redesign based on core business processes, work cells, and team emotional consideration, limited improvement initiatives leave the existing organizational structures untouched, and in doing so cause the various uncoordinated change attempts to work against each other and human resource programs to fail, and provide no support for business objectives. Process-based organization (PBO) is different from business process reengineering (BPR). PBO puts emphasis on global social and technical aspects of human dynamics before technology, business tools, and technique—and for the entire enterprise, not just for a process, a sector, or a new software implementation. The Process-Based Organization addresses cultural transformation in the contexts of leadership, power, and the real struggle of workers with the dominant culture and subcultures that are a reflection of a growing world of social pluralism. PBO is the instrument that introduces a work cell/team infrastructure as the foundation on which to build and enhance productivity and human/intellectual capital simultaneously. The combination of PBO and Team Emotion builds into an organization a continuous improvement mechanism that integrates technical solutions in an organic, self-adaptive and evolving model capable of continually adjusting to an ever-changing business landscape. This is the story of a successful consultant who wants to make the work environment a better place for everyone. John is working on a major organizational change project at an auto parts manufacturing company. He convinces Martin, the company president, to make a radical transformation involving the entire organization structure, the processes, the workforce distribution, and the company culture. Extensive dialogue with leaders, managers, workers, and outside stakeholders cover the many problems, arguments, and alternative angles related to a deep-change project such as this one, which involves the entire company, as well as its human and intellectual capital, team emotion, and such creative human organization structures and methods as teams, work

cells, and continuous improvement.

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The Process-Based Organization addresses the concerns of all labor: White collar/office workers, management and leadership, and blue-collar union concerns, as well as labor management issues that bridge community and company. It culminates with a candid analysis of the future of organizations and the responsibilities of leadership, labor, and institutions in the creation of a better life for all workers. Compromises made by labor and management spell out a sustainable work environment that promotes higher productivity, human motivation, and the team emotional competence needed to succeed. The objective of this book is to provide a holistic view of the elements and complex dynamics involved in creating successful socio-technical systems in a modern organization. Caring for the human being and the team, self-evolving, and improving processes and roles are important and critical goals. The book illustrates the use of sustainable approaches to the introduction of organizational variations with a global focus. The story unfolds much like a change project evolves, based on the lived experiences of six characters. Presented in the form of a novel, this book offers an effective educational tool to various audiences, who can identify with the characters and explore key organizational change issues and compare them with their own points of view. The book will help employees and managers at any level understand through insightful dialogues and reflections the why's, what's, and how's of major business redesign, cultural and leadership transformation, and team development. page_xiii Page xiv

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Page 1 1 The Traditional Organization For the past 10 years of my life, I have worked as an independent consultant involved in organizational change. Since the beginning of my career, I have focused on factory reengineering, mainly just-in-time reengineering, and I traveled around the country changing factory operations of all kinds. Later on, I applied similar concepts to administrative offices and logistical departments in major companies. When the term reengineering was popularized in the 1990s, it was used to refer to something that had been happening in manufacturing companies for a long time. Forming cells or process-based teams in production plants and factory offices is one example of this. Nevertheless, the concept of reengineering has evolved from a kind of revolutionary work redesign into the concept of process-based organization, PBO, which is an even more revolutionary approach to change that extends beyond the work redesign. A year ago, my friend Martin, president of a company that produces numeric-controlled lathes and auto parts, asked me if I could help him with the direction of his company. Martin's company is a subsidiary of a large holding company; he supports his clients through regional branches and a network of sales and distributors of automobile spare parts in numerous territories. When the comptroller's office asked Martin to start producing additional monthly reports, he suspected that the subsidiaries' monthly results were being closely watched by the holding company. The measurements that needed to be reported now included monthly levels of stock and daily customer delivery lead times, as well as all the other customary financials. In addition, the new reports required changes in the information

systems programs.

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Page 2 When Martin asked me to become part in his company, working as a member of his staff, it was a difficult decision for me to make. It involved a profound change from my work-life style. I would be forced to abandon my independence and to be tied down to a desk and to timetables; in short I would have to give up my freedom for the duration of the assignment. At the same time, I started thinking about the possibility of introducing revolutionary production and efficiency concepts to Martin's company. I had already implemented these concepts in other companies, but this time there was an advantage: the company's president was a friend of mine, and I would be sure to get senior management support and involvement in the project from the start. But even more importantly, I considered Martin to be a role model of leadership behavior. More than anyone else I knew, he understood business, appreciated the imperative of change, believed in people, and cared for human conditions. Excited about this opportunity, I agreed to a long-term consultant assignment with Martin's company. While driving to Martin's office building one day, I was thinking that I would like this to be my last assignment in the big city. Although I was relatively satisfied with my life so far, I realized I aspired to live the rest of my years in a different way: to have more contact with nature, particularly the sea, and to have more time to spend with my wife and children. In the middle of this thought, I realized I had reached Martin's office building. I parked the car and as I was heading for the elevator, I ran into Martin. "How was your weekend?" he asked. "It was fine," "I replied. "I rested, exercised, and played with my kids." "I was thinking about something you told me last week. Can we talk for a few minutes?" Martin was very direct with his questions, so I supposed he had been thinking about something important that took the form of an idea over the weekend. When we arrived in his office, he turned on the light, invited me to sit down, and immediately asked his assistant for two cups of coffee—his favorite hot beverage. "John," he said, "I have been thinking about all the ideas we talked about last week—about how to change this organization. Something worries me, and it is not related to any technology or to page_2 Page 3 how to introduce change, but to whether my organization will support it. In other words, how can I be sure the directors are sincerely supporting the change, and not just paying me lip service?" "That is one of the most difficult things to address," I answered. "Nobody in management will reject a change, at least not openly. More so, if a person rejected an idea openly, it would be easy to identify the reasons and worries, take them into account, and help that person understand the rationale for the change. The problem exists when managers are not sincere or are not conscious of their feelings, and although it appears that they think they agree to the changes, they really don't." Martin asked, "Is there a way to know precisely how they feel about change? Or, if they think they agree, to help them surface how they truly feel?" "We can't subject the directors to a lie detector test to find out whether they are telling the truth or not," I answered, "or if deep down they are not sure how they feel about it. The most appropriate way I have found to anticipate people's behavior is by analyzing their pasts. If the person has assumed certain risks in his or her career, has been generous toward others, is self-confident and is willing to trust competent people within the organization, and is charismatic, she or he will probably be a good leader in this project. If, on the contrary, a person has always avoided risks and does not confront uncertainty and challenge, it is likely that this individual is not a natural leader for an area that needs changing." "Nevertheless, we are having the meeting you requested with the directors next Friday," said Martin, "to present the objectives and reasons for the change. I believe that we will have an

opportunity after the meeting to discuss how you feel about their positions. By the way, John, I was surprised you deliberately avoided using the term reengineering in the invitation." Reengineering: A Confusing Word "The reason I left the word reengineering out is that we are aiming at something quite different from what everyone understands as reengineering. In the past, the term was used in relation to the page_3 Page 4 traditional change process where integrated systems were implemented, or to indicate the restructuring of a company's sector or department. The term has also been used in reference to the performance of value analysis, a technique that has been applied for decades. What normally happens is that once reengineering has been carried out and some processes have been fine tuned by a value analysis, they achieve faster execution thanks to information technology, but net results are not what were expected. And it is even worse when companies combine an incomplete change effort with a drastic downsizing and consequent loss of critical talent, only to find that the expected efficiency increase doesn't materialize and they have to hire more people again, reorganize again, and limp along through long periods of poor performance." "Traditional" Change Process

STEPS: 1) Analyze the process: "value analysis" 2) "Clean up" the process (to achieve value addition) 3) Automate the process: Information Systems support Figure 1. Process Reengineering Across Functions "How does that happen?" asked Martin. "The net results do not meet expectations because they affect only some spots or islands within the organization. The efficiency increase in these islands stays in the functional departments on page_4 Page 5 which the traditional organization is built. But the problem is still there for the whole company, if not for the department, because processes normally cut across many departments and any efficiency improvement on one area gets cancelled by the inability of other areas to handle the increase in transactions, cases, widgets, etc., coming their way. The net result is still zero." "So John, are you referring, for instance, to the Orders, Credits, Billing, and Factory Programming Departments as they exist in our company?" asked Martin. "That is exactly right," I answered. "Suppose you have worked on the company's processes improvement through a reengineering effort in the Administration-Commercial Department. Once the process has been redesigned or reengineered, a value analysis is performed to eliminate inefficient procedures and practices. Once this purification is carried out, all

processes speed up through an information system. Usually, when you reach this stage, everyone within the organization congratulates one another for finishing the reengineering project. "But even though the organization has adopted more productive practices and possibly a new information system, the old organizational structure remains. The reformed processes continue flowing through old traditional departmental structures. Once a client's order is received, it is recorded in the system and then sent to the Credits Department. But even though you now have an integrated information system, there still is an imbalance in the operations of the two functional departments where different groups of people with different specialties work yet own the same business process. "Imagine taking a picture of the administrative flow between these two stages of a process: You will see the Credits Department becoming a temporary bottleneck because it cannot process all the clients' orders that are accumulating in the information system. At that moment, if you take a picture of the process flowing between these departments, despite the reengineering in order entry, you will still notice three negative effects. First, there is uneven distribution in the amount of work. For example, the Credits Department staff is overwhelmed with work, while the Orders Department staff has nothing to do; an hour later, the opposite page_5 Page 6 might be true. In both situations, one department or the other is wasting time. The result is a reduction in overall productivity and an inefficiency that is inherent in the dynamic flow of the system, although the value analysis can indicate otherwise. "Second, it is possible that when the Credit Department authorizes an order in the information system, it finds that a salesperson has entered the wrong sale terms and conditions. If the salesperson has placed a very large number of orders, the quantity of lines with internal mistakes will also be very large. Therefore, a post-mortem review will be important so that they can uncover the replication of mistakes related to the quality of information. "Finally, if the flow is not balanced, you suddenly find a bottleneck in the Credit Department due to accumulation of information lines to be processed (each line corresponds to a client). Because of this, small incremental lead times continue to increase. This queuing period is only one of the several wait states the order will go through in the logistics chain and along the administrative chain from order processing to production to dispatch. To sum this up, productivity, quality, and response time seem to be permanent pending tasks after all conventional reengineering projects come to an end." A Cell Is Not a Business Unit "So then," commented Martin, "if productivity check-points are kept within each department, we may be able to identify entire blocks of mistakes in critical information. Because of the dynamic characteristics of the information flow, the staff wastes time unintentionally, and this brings about lack of productivity and delays in the entire requisition-to-billing cycle." "Exactly," I answered. "Although conventional process reengineering has been carried out correctly, functional departments obstruct the process as if they were separate islands in the sea, resisting the speed of the water current. That is why reengineering is not complete if the advances are not accompanied by a corresponding readjustment of organizational structures to the new processes. This is easy to say, but it is extremely difficult to carry out. We can call this process postreengineering —going beyond page_6 Page 7 the business process reengineering to reengineering of the organization's structure itself." "When you say it is a complex process," asked Martin, "do you refer to technological factors or human factors?" "Both," I answered. "There are new structural and technological challenges, but the

complexity, risk, and opportunities emerge from the human side." "Tell me in practical terms what you mean by a process-based organization," asked Martin. "It is not easy for me to visualize it." "A process-based organization involves forming mini-organizations or mini-companies within a larger enterprise," I replied. "In general terms, it is as if basic departments within the organization contribute with part of their staff, and dissolve to form mini-companies or work cells with a specific characteristic: Each cell, instead of including people performing only one function, will include representatives from each function performing different stages of the process. Each of these cells could assist, for example, a specific group of clients."

Figure 2. Problems with the Traditional Change Process

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Page 8 "But what happens with the established order—with line management? Don't you lose control of the organization?" asked Martin. "You not only loosen the controls, but you also establish a simpler and more effective type of management. The cell is controlled by the people who own the processes they are involved in ," I answered. "In order to visualize this a bit more clearly," added Martin, "if we consider the example you mentioned before—that is, forming a sales administration cell—would this mean placing orders, credits, billing, factory programming, administrative, and collections staff in the same 'work habitat'?" "It is possible," I answered. "That would be the case if you consider one of the fundamental processes within a company, such as the orders-collections cycle in a traditional business that delivers industrial goods or mass-consumption goods. But remember that a cell is not a business unit . Normally, a cell has fewer members, which allows the development of a more effective (and also affective) relationship within the group. The cell also comprises a larger number of activities in a process than would a functional business unit, such as a department." "We may need to redefine the term process here in order to understand this clearly," added Martin. "How many processes are there in a company?" "It varies with each company," I replied. "In a conventional organization, I estimate there are

about 5 to 10 basic processes. These basic processes can be divided into essential and supporting ones. Essential processes are related to the business's inner nature—its objective. For example, what is, in your opinion, the essence of an industrial company? And what are the basic activities that form the backbone of the company?" "I guess those that comprise selling, processing orders, producing, distributing, billing, and collecting," responded Martin. "Exactly," I answered. "Those are some of the most essential processes of the company. There might also be supporting processes, such as those related to financial analysis, engineering, or human resources." page_8 Page 9 "Can we say that basic processes are processes that cannot be outsourced, that are related to the company's competitive advantage, and that are supporting processes that can be delegated or subcontracted, when outsourcing is possible?" asked Martin. "Not necessarily. The competitive advantage of each company is based on an analysis of its differentiating capabilities with respect to competitors, and the company's ability to turn those capabilities into results. The analysis of differentiating capabilities cannot be done only at a strategic level. What I mean is that the identification of these differentiating capabilities should also be done at a tactical level, which integrates culture, systems, and people's competencies, or anywhere there is an advantage with respect to competitors. To not combine strategies and tactics would be like designing an excellent aerodynamic car and discovering that the necessary knowledge, technology, and speed to manufacture it are lacking. Where is the advantage in that? "Once key competitive abilities are identified, all processes related to these capabilities become key elements. We should never outsource any processes that give us a key competitive advantage. Key productive capabilities, included in one or more processes, may be formed by both basic and supporting processes. An example of the first case would be a company that bases its competitive advantage on the quick processes of order taking and delivering. An example of the second case would be a company that bases its differentiating ability on a design made by its Engineering Department. A third example could be a company that excels in sales and building client relationships and goodwill. According to some studies done on market leadership, all three capabilities are needed up to a certain level, but you can excel effectively only in one area, due to resource limitations." "Going back to the example you mentioned," replied Martin, "let's suppose we have already identified the processes within the company, both basic and supporting ones, and we have decided to organize the company around those processes that is to say, to form cells to include basic and supporting processes. What would be the advantages with respect to the problems faced by the traditional organization after a reengineering?" page_9 Page 10

The World of Possibilities in the Process-Based Organization "Returning to my previous example," I answered, "imagine a cell made up of people who deal with sales, order processing, credit, billing, factory programming, accounts payable, and billing. They would be a group of people, operating like a soccer team: Each of them has a basic ability corresponding to a basic function. For example, some play the role of forward or defender, others of goalie. In a soccer game, if there is a risk of a goal being scored against a team, sometimes forwards go down to defend the team's goal area, or the goalie comes out to the field to deflect an incoming ball. This is done automatically; they do not wait until the captain tells them to do so, because the captain cannot follow each player minute by minute. "Going back to the business example you mentioned earlier, take into consideration that all the people involved in a process work together, each of them at a desk or computer

terminal. In your traditional organization example, when orders to be authorized accumulate in the credit system, it holds work back, productivity goes down, delivery times are longer for clients, and serious mistakes in information interchange can result. Now, in a cell organization, when the person in charge of credit becomes the bottleneck, the team easily notices this and one of the co-workers picks up the slack. This produces three immediate effects. First, there is a more dynamic balance of work—that is, there is less wasted time, and productivity therefore increases. Second, as bottlenecks disappear dynamically, the flow of information improves noticeably because there are no more islands obstructing the flow, and the order cycle becomes shorter. Finally, the third visible advantage is that there are no chain-reaction mistakes affecting the quality of information. As the flow of information gets faster and bottlenecks disappear, there is not much backlogged information between one person and another within the cell. When a mistake is discovered between these two people, the post-mortem review covers much smaller quantities of information. There is less possibility of finding a large amount of erroneous information accumulating unnoticed. When there is not a large amount of accumulated page_10 Page 11 information between two people in a process, in case a mistake is found, the amount of erroneous information is minimal. In a process-based organization, an integrated computer system is much more effective than in traditional organizations." "I agree," said Martin, "but this involves a significant change in the organization, one that requires a larger amount of resources and effort. There must be additional risks and perhaps other advantages apart from those you mentioned to justify the effort."

Figure 3. Cell/Soccer Team Analogy "Of course, this level of organizational change is not easy," I answered. "And we must keep in mind that it not only involves office sectors. The production areas in manufacturing can also be modified and be more visibly changed by applying these new concepts." "John," said Martin, "I think the directors' meeting will give us a good opportunity to introduce the productivity project you have been working on for weeks. After all, when I first contacted you, that was what I was most interested in. How do you feel about working with us?" "It feels great working here. I believe that in this company, there are very interesting opportunities to directly apply my previous change experiences and latest tools. In addition to this, even

page_11 Page 12 though the project may have some difficulties at the beginning, at least there is a critical success factor in our favor: your commitment to make changes in this company. " "I suppose that the message you are giving me, if I read between the lines, is that I will have to invest a great part of my time on this project. Am I right?" asked Martin.

Figure 4. From Traditional Business to Cells "I can't tell you now what percentage of your time we will need from you; it is just a question of opportunity and quality, not quantity. An appropriate comment at the right time can be more effective than ten long letters to the staff. Presentation of new ideas, explained face-to-face to the staff, can be much more persuasive to the organization than a sophisticated communication campaign." "Okay John, the directors have been invited for a Monday meeting at 9:30 as usual. See you there," said Martin. I left the customer site and headed back to my office. When I arrived, the sun was softly coming through the window. It was my favorite time of the day—I was able to enjoy the light of the sun in my office. If my dream comes true, in a couple of years I will be working at a place more connected to what I like, with more space, page_12 Page 13 air, and contact with nature. Advances in communication were on my side. The lower costs of the Internet would allow me to communicate from outside the city. In that way, I would continue with my consulting services in the future without being physically in town. That was the easy aspect of my plan. The difficult one involved the adaptation of my family. Would my

kids understand the advantages of a quieter place where they could grow up into adolescence surrounded by nature, or would they miss their city life style and their friends? I could not answer that question myself until I saw how life unfolded for all of us. The First Steps The following weekend I prepared Monday's presentation on my laptop. The first part consisted of a presentation of different efficiency and productivity ratios that appeared on the company's control board (or "dashboard"). The second part of the presentation for the directors consisted of the company's competitive analysis report. The control board included traditional ratios of earnings, sales, and assets (which were included on the monthly report to the holding company), earnings on different products, and sales channels. It also included liquidity and indebtedness indexes. This information was generally used by directors, and with the exception of some departments (Production, Sales, etc.), internal costs and global earnings indexes showed the joint performance of different departments of the company. With overlapping responsibilities among directors, each area could not assume responsibility for its share of the company's global earnings. This grey area needed to be addressed. There was always an excuse or explanation to justify the reasons for poor performance. There was no personal accountability. I remembered previous meetings where unfulfilled sales plans were justified by alluding to unfinished production runs, which was caused (and justified) by a shortage of supplies. The Administration Department was in charge of purchases, but the Administration Department blamed the shortage on the finance director for their delay in payments to suppliers, which caused delays in deliveries. page_13 Page 14 While typing away on my keyboard, I was thinking of the political ramifications within the company of my productivity analysis. Martin, as president of the company, would support the findings. All directors would attend: Arthur, the manufacturing director (who was also in charge of Engineering); Susan, the administration director (who was also in charge of Purchases); Peter, the finance director; Klaus, the human resources director; and Robert, the business director.

Figure 5. Cell Design The goal of the meeting was to define with all directors the strategic objectives that will increase productivity, and then prioritize them. My thought was to have a brainstorming session during the meeting in order to share ideas. In this context, it would not be logical to find open resistance to changes among directors. In my experience, identifying strategic objectives with the company's directors usually involves their support, with little or no resistance; it is usually a safe exercise for all to start with. Resistance, strong and weak, sometimes arises when the objectives start to materialize through more tangible

implementation steps. After I finished preparing the presentation, my wife, kids, and I went out for dinner to a restaurant on the riverside. It was a nice evening and people were walking in the park next to the water. We were sitting on a bench waiting for a table, and my wife started to ask me some thought-provoking questions about the project. page_14 Page 15 "Do you believe that people can reengineer or reinvent themselves? Is it possible for someone to purposely change the way he/she feels about the world around them, when the source of those feelings is not very clear, even to them?" I hesitated a second before responding. "Yes, I think that's possible. As in all reengineering projects that define new strategic objectives, which imply internal and structural changes, I believe a person can do the same thing as long as he/she avoids the type of mistakes some companies make."

Figure 6. The Process-Based Organization "Which ones?" my wife inquired. "The most common mistake is setting complex objectives that are not achievable, thus putting off real change altogether. For example, a telecommunications company I worked with modified its organization chart according to a cellular concept. At a certain time in the change process, it was necessary to decide on a new integrated system that would bring about advantages in productivity. But this involved postponing the formation of cells based on the company's basic processes until the design and implementation of the system was ready. Another alternative was to carry out small repairs to the page_15 Page 16 current system and implement a process-based organization right away they'd get immediate results with respect to customer service, faster response times, better overall productivity, and a different sense of personal motivation. Then the integrated computer system could be

completed on a more solid foundation. The company chose the second alternative and postponed the implementation of the integrated computer system. This gave us a much more effective implementation, since the staff could better define their needs after some months of cellular organization experience. I sometimes believe that people seeking their strategic objectives (maybe happiness is the most common one) give preference to expensive investments in infrastructure (for example, a certain type of car or home) instead of seeking the basic things in life, such as affection, good feelings, etc. which are not so expensive, but are much more achievable." "That sounds like my friend at the community center who is putting off going to the gym to exercise because she doesn't have the right outfit or the latest running shoes, when all she needs to do is get up and start walking," my wife replied. The restaurant hostess called our name: our table was ready. Starting the Race That Monday started as all other Mondays. Although I had rested during the weekend, my movements would be slow until they received some external impulse. I left my car in the company's parking lot and went up to a designated project office before going to the conference room. I checked my e-mails, and there was nothing new to worry about. That was a relief. I took off my coat, had my second cup of coffee of the day, and went over the items I would present in the first 10 minutes. This was essential in this type of presentation, because I was selling myself as well as the new change ideas. I left for the projection/conference room to set up for the presentation and met Martin on the way to the elevator. "How are you?" he asked in a friendly tone. "Fine. Is everyone coming?" I asked. "It seems so. All the directors have confirmed their attendance." page_16 Page 17 As the rest of the directors arrived, I prepared the projector and had yet another cup of coffee. (The inscription on the mug I was holding, a gift from Martin the first day I came to see him, read "Coffee=Success." I had no doubt by then that coffee was a cultural item, an artifact with a special meaning in this setting.) The company's general emotional climate was good that morning: People were animated about last Sunday's soccer match. During the first part of the meeting, I showed the company's monthly economic and financial indicators to the group. Findings were clear: Keeping up income margins was getting more costly, even though a great effort in the reduction of costs had been made recently by eliminating superfluous expenses. In addition, the market share had decreased by one percentage point according to the latest statistics. This company was an industry leader and was always in a difficult position, like a boxing champion defending his title. According to Robert, director of the Commercial Department, competitors were not just applying differential price strategies, but were also improving their capacity to produce and deliver the product cheaper and more effectively. The company sometimes made things even easier for its competitors by incurring delays in delivering orders and allowing shortage of stock (in quantity and variety) that was needed to satisfy orders for spare parts. At the end of this first part of the presentation, Martin spoke up, pausing for about five seconds to create the appropriate emotional context for an important announcement. "Folks, I have been thinking for about two months about a strategy to revert this situation. In my opinion, the solution for this is not just a simple reduction of costs. There are factors that affect our sales and are not only related to prices. We have to improve our customer service: not just the quality of information, but also our delivery times. Our competitors, usually companies smaller than us, are more nimble to respond to change and more quick to adapt. Focusing only on a reduction of costs without looking at how we operate as a company can lead to even lower quality of service, loss of market share, lack of motivation in our staff, and shortage of human resources when and where they are needed most. All of this leads, no doubt, to the inevitable loss of profits, reduced sales commissions, and the slow death of our company. That's why I invited

page_17 Page 18 John to explain what he has found out in his research and consulting on these same issues at other companies, and tell us how we can approach our current situation in the most intelligent way to face our immediate challenges—offering a better quality of service at reduced costs, and preparing ourselves to compete in a global market—that is, to become a 'world-class' organization." I jumped in: "And also, Martin, increasing employee motivation and overall happiness at work. But before I start, let's make a self-diagnosis exercise to point out why each of us is not accomplishing our individual goals. Robert, what strengths and weaknesses do our clients perceive in us? And how do we compare to our competitors?" My strategy for the first part of the meeting was to dispel any delusions that the company "has no problems" and that we're doing "the best we can under the circumstances," or another prevalent excuse "If we only had the latest technology in place, things would be different." Robert carefully crafted his response. "In my opinion," said Robert, "our customers still believe in this company's reputation as a prestigious organization, with a long recognized brand name and consistent quality products. This helps us justify our prices, which are a bit higher than our competition. On the other hand, our competitors are not only offering important discounts, but also an average delivery time of only 50 days for specific numeric-controlled lathes. Our lead time is 95 days. In the case of spare parts and accessories, competitors are delivering them within 72 hours to anywhere in the country. It takes us between 10 and 40 days, depending on the type of spare part. I believe our post-sale services are at par with that of our competitors. Our financing terms are shorter than our competitors' terms, and this is another negative factor. The quality of our numeric-controlled lathes is appreciated by our clients, but the quality of competing products is rapidly improving. Proof of this is that some smaller competitors have extended their guarantees to two years—double the coverage we are offering now. I believe that this, together with other intangible factors that are difficult to measure (such as the degree of attention and customization of clients' orders) make up, in general terms, our weaknesses with respect to other companies in the industry." page_18 Page 19

Factory Aligned with Clients "Okay, that seems clear, Robert. Thank you," I continued. "Within the commercial context painted by Robert, I would like to ask Arthur, the production manager, what he thinks about the situation and what the production issues are that might affect, from the factory standpoint, the positioning of part sales. Also, I'd like him to elaborate on what he thinks the reasons are that prevent him from achieving his goals—that is, the timely execution of a production plan, derived from the agreed-upon sales plan." Arthur took some time before answering. "I believe that in our situation, if we talk about the adequacy of our response to sales, we must consider many factors. Our internal production lead time is 70 days within the total 95-day lead time of the order-delivery cycle. Our suppliers (of supplies type "A") need at least 20 days to comply with our production plans, which means that when Robert and I meet to set production priorities, we are considering that products will leave our factory 80 days after we are preparing the plan. Within these 80 days, some of the clients who have placed orders introduce additional variations to part models, which have not been considered at the beginning of the process, but surprise us at the end, causing big factory re-programming and loss of time. Producing additional, unexpected parts creates delivering delays." "This happens in the production of special lathes, Arthur, but what about spare parts?" I asked. "As far as I know, they are produced against stock levels, not by customer request." "The most frequently ordered parts are produced against stock. Those that are not frequently ordered are produced on demand," added Arthur. "Most spare parts, which are produced against stock, have a 20-day production lead time: the time it takes to produce

them, starting when the products enter the first machine and ending when they go out of the last one. The suppliers of foundry parts take about 10 days to deliver our orders. So when I meet Robert to define production quantities with respect to estimated sales of spare parts, we estimate what will happen with that piece in the market at least 30 days before. After that, spare parts arrive at the warehouse of finished goods. During these 30 days, while the production advances, the market page_19 Page 20 surprises us either with a sudden increase in the amount of spare parts required or with a lack of demand. This is not so serious from the point of view of customer service, but it creates a huge inventory overstock." "The example is clear, Arthur. We are assuming that both suppliers and the factory are functioning as synchronized as clockwork. Right?" I asked. "Exactly. But that is not reality. Our suppliers sometimes have delays. And at other times, due to problems in the internal programming of the factory—especially in relation to complex products—we have all the sub-assemblies ready for final production except for a part we are still waiting for. As a consequence of this small delay in sub-assembly, the production of a complex product, such as a headstock, is delayed for many days." "I was informed that this past year you installed a complex production programming system, an MRP II (Material Resource Planning). Is that so?" I asked Arthur. "Yes. After six months of hard work, we managed to implement a programming system that allows us on one hand to send internal orders to each machine and each factory cost center, and on the other hand, to estimate when a certain foundry piece is needed so that we can prepare purchase orders in advance. These orders, with prior authorization from the Purchasing Department, are sent to suppliers." "Nevertheless, even though this sounds perfect, something is still wrong, isn't it, Arthur?" I asked. "Yes, you are right. It seems incredible, but despite having such a sophisticated system, we have not substantially improved some of the lead times as planned. Our basic objectives were related to a decrease in production lead time, a decrease in in-process stock, and an increase in productivity," Arthur replied. "And what is actually happening?" I asked. "If we took a photograph of the Presses sector, you would see the following: First, the supervisor of presses receives daily a group of production orders of different products to be processed. As you know, each sector's performance—in this case the Presses sector—is measured through a standard cost system that stipulates the standard number of hours needed to produce a series of products. page_20 Page 21 Any variations from the standard are then computed to evaluate efficiency. Let's suppose that the supervisor has in his/her hand production orders for metallic pieces included in finished products A, B, C, and D. At that moment, one of the presses is producing product A pieces. By installing an additional piece into the machine mold, pieces for product B could be produced without introducing a complex change or setup, which would be necessary if products A and C were to be produced. Setup typically wastes a lot of production time, and thus can cause the supervisor to receive an inferior rating in efficiency at the end of the month. Because of this, the supervisor will logically choose the following sequence: first A, then B. "Now, let's see what happens in another sector. Let's take a photograph of the Transfers sector, which is producing pieces that are part of a finished product and that include pieces coming out of the presses. For the same reason it is happening at the Presses sector, the supervisor might decide to start producing pieces for product A because this sequence minimizes change time. Or he might decide to do so for other reasons: For example, the person in charge of setup for product B pieces is absent, so pieces for product B are not produced. So the sequence at the Transfers sector is first A, then C. In any case, when we

analyze the production from a general point of view, and particularly from the final Assembly sector's perspective, we observe that pieces of product A, from the Transfers and the Presses sectors, have advanced synchronically through the factory and are waiting to be assembled. But pieces of products B and C are still in process, respectively at the Presses and Transfers sectors, and must wait there until product B pieces are available and product C pieces can be made at the Presses sector. So clearly production is not synchronic. Stock accumulates along the process, and delivery times are delayed. Even though the MRP II system is useful for general planning, it is not really so helpful for production programming and sequencing. To compensate for this, human 'activators' analyze which pieces are insufficient at the Assembly Department and redefine manufacturing priorities with each sector supervisor." Arthur realized his explanation was getting convoluted, so he stopped talking, but everyone there grasped the problem: There was a great deal of page_21 Page 22 inefficiency built into the current manufacturing process, and technology was at best a marginal improvement. "Okay, Arthur," I said. "Have you tried to apply the Bottleneck Management Techniques? As far as I know, the application of this theory results in an adequate management of bottlenecks. Production can then be re-sequenced in a more efficient way." "Yes, we have tried the Bottleneck Management Techniques, but we have found two drawbacks. First, due to the great variety of pieces we produce (more than ten thousand), bottlenecks vary permanently according to product. In addition to this, the synchronization effect we are looking for (joining 'sibling' pieces that are produced just-in-time) leads us to think that the best solution is not a 'pure' one, but a combination of different approaches to problem solving," said Arthur. "What other complications are you detecting in the factory that can affect the Sales Department and ultimately clients?" I asked. "Well, we still get surprises at the Assembly sector when we are completing the assembly of a group of pieces and we are still waiting for the supplier to deliver one piece. This delays final assembly. In addition to this, during the 60 days we have to produce pieces, it seems that, thanks to Murphy's Law (if anything can go wrong, it will), most variations from clients are received in the last 20 days of the process, which forces us to do an inefficient reprocessing of orders. Of course I understand that clients need to introduce changes to their numeric-controlled lathes or need to add more spare parts to their orders, but this produces a considerable degree of chaos in our processes." "Okay, Arthur, thanks. I believe you have given us a general idea of the weak points you find in the factory that can affect sales. I'd like to know now the opinion of our finance director, Peter. What can we do to improve our relationship with clients?" Finances Aligned with Clients "Let's see, John," responded Peter. "From a financial point of view, you know that any increase in the financing term to our clients also creates a certain financial cost for us. And this financial cost page_22 Page 23 increases our fixed capital costs, which is an important issue. As Arthur mentioned, internal production lead time is 60 days—an article takes 60 days from the moment it goes into the first machine until it is completed. This means we have in-process stock in the factory during that period—we have fixed assets for 60 days at a cost that is in-between the cost of raw materials and finished products. And I can assure you that this is a great burden, as you can see on the control dashboard. "I'll give a quick example so that you understand what I mean. Suppose we produce five numeric-controlled lathes a day at a cost of $200,000 each. The total cost is $1,000,000 each day. Let's also assume that the cost of raw material necessary to produce them is $200,000 and the average cost of in-process stock is $600,000, somewhere in between the daily cost

of raw material and the daily cost of finished products. So, at the factory, we have a capital of $600,000 frozen for 60 days, which amounts to $36,000,000. We need to finance this amount, obviously. And I dare say that from my point of view, the in-process stock does not represent any value. If it had the value of raw material, we could even return it to our suppliers in case we had financial difficulties. And if the products were finished, we would be able to sell them. But what can we do with half-machined headstocks? What we need to do is turn it into a finished product as soon as possible. That's why I think there is synergy among the factors surfacing here. "In my opinion, I would not recommend getting into more debts to offer longer financing terms to our clients, unless we improved internal processes to produce finished parts faster. Another thing I can mention is that within the 90-day order-delivery cycle, we include 15 days for the administrative-commercial processing of orders (this involves the processing of the order itself, credit lead times, production programming times, and billing). Let's assume that we maintain our current production lead time and shorten instead the administrativecommercial time of the cycle; we could still reduce significantly the order-delivery-billing cycle. This would enable us to have orders received, delivered, and billed in a shorter period. By doing this, we would rotate the company's capital more frequently and would improve our cash-flow in a shorter time because we would be receiving more cash from page_23 Page 24 our clients (costs plus earnings). That is why I believe it is important to improve the administrative sales-cycle," concluded Peter. "I agree with you, Peter," I replied. "I think that we should also monitor branch offices and distributors, shouldn't we?" "That is right, John. As you know, we have inventory of some of our best-selling lathes and most-in-demand spare parts in our branch offices. Our branch commercial managers say they cannot sell unless they have the parts in the back, which is an important consideration if we look at it as working capital. In addition to this, our distributors who operate within exclusive territories complain about our delivery times. They indirectly demand an increase in inventory levels of parts." "But this will not offer them an absolute guarantee," added Robert, "because our clients often order what we don't have, and we have an overstock of what they don't order." Robert answered with a trace of irritation in his voice. "I agree, Robert," I replied. "That is why you have an inventory of finished products, just to better service the clients. Client demand determines the mix of products in our warehouse, and not an 'economic quantity of stock.' In an extreme case, you might have only one item of each product, which is permanently re-supplied in the warehouse, again just to be able to offer better customer service than if we had a warehouse with large numbers of parts in stock that customers don't buy." Robert felt reassured by my response; he knew exactly what I was talking about, but more importantly, he knew that I knew, and left the door open for me to suggest new approaches. But two people in key areas remained silent: Susan, the administration director, and Klaus, the human resources director. "So, Klaus and Susan have been very quiet," I said. "Susan, in your opinion, what are the things in your department that affect clients in any way?" Administration Aligned with Clients "John, as you already know, I am in charge of the Purchasing Department. I share a big responsibility with Arthur with respect to page_24 Page 25 suppliers. Arthur comes from the manufacturing perspective; he is responsible for programming purchases. I come from a supplies perspective; I am responsible for contractual terms, delivery times, and prices. All these determine higher or lower inventories of raw material and higher or lower financial costs, as Peter pointed out earlier." "I see, Susan," I replied. "After purchase orders issued by the MRP II system in Arthur's

manufacturing areas are correctly issued, you assume all responsibility for the correct processing of those orders." "Exactly," she answered. "I think there is something we have to clarify when we refer to a purchase order that is correctly issued by the MRP II system. Sometimes the system works well, but it depends on our inputs. What I mean is, when we had to carry out physical inventories at the end of a financial period, we found that there was stock of raw material for items that appeared as needed in a purchase order, and we lacked stock of basic items that had not been included in any purchase order loaded in the system. Apparently, the timing of our input is not good—that is to say, the loading of data into the stock system is done too late, or there are human mistakes in the quantities loaded, the actual quantities delivered by suppliers, or the quantities used for production," said Susan. "What you just mentioned Susan, happens in many companies. Mistakes in the stock replenishing process have nothing to do with the information system itself, but are generally the consequence of a delay in the loading of data or careless human mistakes," I concurred. "There are other things in your department that affect the relationship with clients," said Robert to Susan. "I am referring to mistakes in debit notes. Of course clients never complain about credit notes!" he added. "And what about costs?" asked Martin, who had remained silent until then. "Does our costaccounting method affect in any way the relationship with our clients?" Martin was looking directly at me as if to say, I've already heard all the homegrown excuses. Let's hear your opinion. "Well, not directly," I replied. "Even though Susan is in charge of Cost Accounting, I know this because of my experience working with comptrollers. Cost accounting might affect the page_25 Page 26 relationship with clients only in cases where the cost of a product does not reflect reality, which can lead us to making the wrong decisions in relation to discounts, promotions, pricing of products, product discontinuance, etc." Martin kept staring directly at me, as if I hadn't finished my sentence. "In my opinion," I continued, "this company has a basic problem: Overheads, which amount to between 40 and 60 percent of product costs, are being allotted to each product according to the labor cost of each (which, by the way, range only from 5 to 10 percent). Basically, you are prorating the cost of the elephant—your overall company general and administrative costs —to a mouse-sized manufacturing overhead. This is causing a strong distortion in the actual production costs. For example, our long-series products, such as standard lathes, are overvalued with respect to their real cost, while unique short-series products are undervalued in respect to their real cost. This forces Robert's Business/Commercial Department to make wrong strategic decisions, such as deciding to discourage sales of apparently less competitive products and promoting sales of those that seem to be more profitable products, such as lathes with other functional modifications." "In that case, what should we do?" asked Martin. "Discourage the sale of our most sophisticated lathes?" "I don't think so," replied Robert, "because they are our differentiating advantage in the market." "In fact," I added, "the first thing we should do is determine the real cost of each product. And then, if our differentiating advantage lies on the most sophisticated series, as Robert says, we need to have competitive costs in that kind of products." "Okay," said Martin, "I believe we now have some idea of what is happening or not happening in our operation. This meeting has been longer than expected. John has not presented his project yet, and Klaus has not spoken at all. I suggest giving Klaus the opportunity to express his opinions and postponing John's presentation until next Friday. Anyway, I believe today's exercise has been good for all of us; we needed a dose of reality." Repeating my question, Martin asked: "Klaus, what do you see as the major influence of your department, Human Resources, on page_26

Page 27 clients?" Klaus, caught off-guard, straightened his notes on the conference table and looked up, fixing his eyes on Martin. Human Resources Aligned with Clients "I believe that the human element of this organization has a direct effect on our competitiveness in the market," Klaus responded, after a few moments of reflection. He was nervous but excited by the opportunity to relate human resources to company strategy. "For example, in the factories, if the degree of cross-functionality of our personnel increases, we could manage to counteract the problems of absenteeism, which sometimes prevent Arthur from completing a process in time. Or we could cause a delay in the delivery of products to our clients, with the severe cost consequences we've already discussed. In addition to this, if we succeed in making everyone in our organization—management included — put their positive energies into the company and for the service of our clients, I believe we could obtain tremendous intangible benefits. A motivated workforce is a leverage we should consider in a competitive analysis." As soon as Klaus finished, all eyes in the room turned to me, including Martin's. I agreed with Klaus and he responded by smiling in self-satisfaction. "To turn to numbers relating to what Klaus is commenting on," I told the group, "I'd like to ask you something: You know that in the brain, our neurons can achieve a synergy that creates perfect communication among them, making them work as a harmonious whole. If a company was a brain, and the people within the organization were neurons, what percentage of synergy (100 percent being the best possible organizational synergy) would we have here in this company? Think about the significance of this question: to have an organization where thoughts spread freely and openly, and where the organizational culture allows people to communicate their best thinking up, down, and across levels. What I am talking about, for example, is getting our employees on the way to work to think about how to improve products or create new processes. I am referring to an organization that will consider and approve of such ideas, that embodies the synchronization page_27 Page 28 of its people's brains, just as our brains synchronize the neurons within. Again, what percentage do you think represents the degree of synchronization in this organization?" After a long pause during which no one said a word, Martin broke the silence: "I believe our organizational synchronization, using your expression, is between 10 and 13 percent, no more. I also believe that, in strategic terms, this is one of the most important points to encourage in our company. Within a market where all machine manufacturers have similar percentages of earnings on sales, and where competitiveness based on prices is out of the question, the only strategic tool is innovation in our processes and in our team spirit . For this company, a mixture of metallurgy and electronics, our employees are by far the key strategic leverage to obtain an edge over our competitors." I nodded in agreement. "Consideration of 'human capital' is the key to success not only in your company, Martin, but in any organization that wants to survive in our permanently changing world. Considering the dynamism of markets, prices, and products, the company needs to build its advantage on management and people. The problem is that having good people is not enough. Having intelligent and honest managers and experienced and capable personnel within an organization that does not benefit from them—that does not fully employ its human resources—is like an excellent network of roads with blocked bridges. In certain sections of the road, we operate efficiently, but if our objective is to get to our destination by crossing several bridges (positioning and selling a product competitively in the market), efficiency and speed in highways are useless if the bridges are blocked. "You may ask, 'But what are the things that block our bridges?' There are many. If even one single component does not work harmoniously with others, it affects the dynamic fluidity of the whole organization. It is like a giant jigsaw puzzle where every element needs to be in its proper place, connected properly yet with the freedom to move and adapt as needed.

Increasing the return of human capital means looking at the way the organization chart is divided, the functional departments are organized, processes are executed, technology is utilized, projects are initiated and page_28 Page 29 terminated, and the culture is conducive to growth, adaptation, and innovation, where every employee is happy to belong here." As I concluded my remarks, Klaus continued to smile at nothing in particular. This was the first time he came to a Monday meeting where he felt he really belonged in the management team, and everyone else recognized that as well. This was a new feeling for Klaus, and one could sense that in his smile. Considering Teams Talking with Klaus later, I learned that he had listened attentively to the discussion at the meeting, especially what Martin and I were saying, and wrote down in his notepad several key concepts he wanted to revisit with me, in private. From experience, Klaus suspected that something more profound existed at the collective level of team subconscious that created obstacles—mental blocks to implementing teams that function as Martin and I had described —in the more traditional organizations. Based on his many years of experience in several well-established mature organizations, Klaus had observed that most teaming efforts failed for one reason or another, and only a few were really good. The groups that were good had a special kind of team spirit (as Martin had called it) that felt different to other teams, and as a rule were more productive, respected by management, and fun to be in. But why? Klaus pondered. How did it happen that a team developed this positive attitude, this collaborative character? Klaus was happy to hear words like team and team spirit , but was skeptical of anyone else's understanding of these and other over-used buzz-words in the business world. "Hey John," said Klaus, "I'd like to chat with you some more about a few ideas you mentioned that peaked my interest, and also discuss some thoughts around team spirit. Can we meet? I think you may be able to help me better understand the human side of organizational change." "I am free tonight," I said, "if you'd like to join me for dinner. We should be able to talk about these issues at length." I had already noticed that Klaus was taking notes during our previous page_29 Page 30 conversations, and I was somewhat curious about Klaus's position, given the critical role he had to play in this change project. "By the way, Klaus," I said, "there is really no such thing as team spirit , unless you believe in ghosts; but there is, however, a team emotion that materializes through collective acts of emotional display . I'd be happy to expand on these technicalities with you." "Okay, that sounds great! I will see you then," said Klaus with confidence. As he walked out of the room, he handed me a piece of paper torn out of his notepad on which he had jotted down a few rough thoughts: Enterprise as a brain People as neurons Liberating positive human energies Organizational cultural substrate

Organizational synchronization as an orchestra Spirit of the group/team spirit Organizational harmony and fluidity Change starts at the team or cell level Emotions/team emotion Emotional contagion Collective acts of emotional display I smiled back at Klaus as I read them, knowing that they would eventually be elaborated on and shared. An effective transformation to a process-based organization was a real possibility for this company. Our first meeting on the topic of change had developed like nothing I had envisioned, but the emerging results were much better than anticipated. Any more information than just a "dose of reality," an awakening of their interest in change, and sensitivity of the human side of organizations was more than I had dreamed of achieving at such an early stage. page_30 Page 31 2 Preparing the Road for Change "John," said Martin, "Why don't we continue our meeting with the directors this Friday? I'd like you to introduce a working plan related to what we talked about today. Can you do that?" "Okay, I'll work the plan into my presentation. See you on Friday, Martin," I replied. I headed back to the office to pick up my messages before getting ready for dinner with Klaus. Meanwhile, the directors were also leaving the building. They were making jokes and pointing at each other in jest while recalling productivity issues discussed at the meeting. Apparently, the atmosphere of the meeting had been good and we had started to work harmoniously as a team. To control any misguided optimism on my part, I reminded myself that first meetings were never conflictive. Maybe that was because everything was said in generalities and theoretically; time would tell. I arrived at my office. In my e-mail inbox were several requests from the client company's main office, related to cost information on a new line of products I was helping them prepare to launch. I remembered the subject of that morning's meeting—the lack of accuracy in actual costs. I made a mental note to include the cost of launching new products in the working plan that Martin had requested. The overall philosophy I talked about in the morning meeting was that we could have both a more productive company and happier people working for it. That was perhaps the key thing that reinforced my conviction of what I had said to the group earlier; we had reached a point where the people and the company could benefit equally. I also believed that basing the organization on processes was an irreversible change for any company in the short or medium term. In previous attempts to implement productivity page_31 Page 32 schemes, it seemed that Martin's company had won and the workers had lost (whatever "lost" meant to them, it had the same emotional downfall). After the company put into operation an excellent analysis of methods and times, the factory workers produced a considerable quantity of parts, working always at the same position and at the same machine. Performing the task repetitively exhausted the worker physically and even lead to accidents. Doing the same task, day after day, becoming like an automaton, workers stopped paying attention to variations in the process. I remembered a scene that took place ten years ago when I was helping another company implement cells and Kanban* in their production plans. One morning, when I arrived at the factory, I noticed a great commotion in the Presses sector: a worker had accidentally cut off his fingers because he placed them below the mold. This memory always shocks me. No matter how long it has been since the incident, the emotional trace is always there with the same intensity. It is this concern for the human condition in the workplace and the responsibility that I take

on to ensure that incidents like the one I just described don't happen that move me to study process efficiencies that serve human beings, and not the other way around. And in addition to the physical accidents are the even more prevalent psychological issues. Although these psychological incidents are less dramatic than physical accidents, they are no less dehumanizing. I remember the weariness and saturation experienced by office workers whose only function was to enter orders into a computer. After the implementation of a process-based cell structure at a factory, however, a team of workers not only interacted with different machines, but also interacted with themselves, as small-businesspeople, contributing to a specified result for which they were accountable. The same result can happen in office cells as well. A primary difference between a process-based cell structure and * Kanban: A Japanese term whose literal translation is "signal." It is one of the primary tools of "Just-In-Time" manufacturing systems. It signals a cycle of replenishment for products or raw materials. A Kanban manufacturing system maintains an orderly and efficient flow of materials throughout the entire manufacturing process. It is usually implemented using a printed card or bar-coded label that contains specific information such as part name, part number, description, quantity, etc. page_32 Page 33 other types of business organization is that there is a permanent cross-functional team in the cell that replicates some aspects of the larger enterprise. Another advantage of cells is that human beings interact more freely with one another. When morale is low and workers are not motivated, the cell structure (resulting from processbased organization) is one of the best antidotes. Teamwork in the cells is also an important attitude catalyst—something that cannot be found in purely individual work. "John, it is 7 o'clock! You asked to be reminded…" my assistant called out from the hallway. From inside my office, I echoed, "7 o'clock already?" I quickly wrapped up my work for the day and headed out to the restaurant where Klaus and I were having dinner that night. When I arrived at the restaurant, Klaus was already there, sitting at a small table away from the main traffic area. Papers were all over his side of the table and on the chair next to him. He was deep in thought. As soon as he saw me approach the table, he put away all the papers and stood up to greet me. We sat down, engaged in small talk for all of three minutes, and ordered our dinners before he struck me with the first question. Many more would follow—Klaus had done his homework. "John, I have been dying to hear you expound upon your work and research in the area of human factors related to the implementation of process-based organization. Tell me, what is this team emotion you were talking about?" asked Klaus. "In simple terms, Klaus, team emotion can be defined as a collective act of emotional display triggered by emotional contagion. This of course can be good or bad for a team, depending on the nature of individual feelings and collective emotions that exist within the team." "Okay, John," replied Klaus, "please forgive my ignorance on the subject, but are you saying that emotions and feelings are different things? And what is a collective act?" "Yes, they are different things, and the way I see it—which, by the way, has been substantiated by my research and that of others in the field—feelings are fundamentally private experiences or sensations of anger, joy, anxiety, etc., while emotions are the public page_33 Page 34 display or performance of feelings, either authentic or simulated." Klaus frowned at hearing my last words: "Yes, simulated. You'd be surprised how much of what we call emotions are in fact forced false emotional states that we perform in order to comply with social expectations, or simply to control a situation. But what is important in

either case of emotional display is the effect that it has on the other team members." "Oh, I see," said Klaus. "Then what you are saying is that when everyone is feeling the same way about something, and each emotes accordingly, then we have a team emotion for the entire group that can be positive or negative, and that is productive or unproductive." "Yes, Klaus, but your description is only partially correct," I replied. "Team emotion is not the feeling, but the feeling transformed into a collective act; the collective act is what identifies the group or work cell as a real team. You've seen what happens when you put a group of people together on a new team, haven't you? There are lots of random feelings and emotions, and for the most part, people don't know how others feel about them, about themselves as members, and about the team as a working unit—that is, feelings about their work, their organization, their surroundings; being together or apart; having the right tools or not; liking their manager or not, etc. As time goes by, some of these feelings are sorted out by the members and shared among themselves or mimicked and intuited through emotional contagion. As more members of the team share feelings and emotions, they act according to a shared mental state—an emotional state—and the team starts to behave and act as a group, in a particular way, and as a real team. Can you visualize what I am saying?" "Yes!" replied Klaus. "I had suspected all along that emotion played a vital role in the success or failure of teams; I've seen it happen many times, in worker teams as well as managerial teams. But tell me, John, this team spirit—sorry, I meant to say team emotion —how does it come up? I can understand how individual emotions work, and I've even read about emotional intelligence, which is mostly an individual thing, but what I don't understand about team emotion is how a group can emote as a whole. And why should I care, as a business manager?" page_34 Page 35 "Well, Klaus, for someone who pleads forgiveness for his ignorance, you sure are asking all the right questions," I commented, giving Klaus my vote of confidence in his perceptive ability. "Let me see. Your questions require a lot more elaboration in my answers than we really have time for now, unless we want to stay here for breakfast, but I think you understand the importance of this concept well enough to make up for my hurried explanation: Team emotion—that is, the collective act that constitutes team — emerges when there is a high level of emotional synchrony or emotional resonance that generates a series of behaviors and collective acts that respond to a higher consciousness than self: a real team. By 'real team' I mean a high-performing, well-adjusted group of individuals that includes any type of human group (i.e., factory and office workers, professional and management groups) working together to accomplish shared goals. Team emotion comes up when the contextual or intervening conditions in which the group operates are the 'right' ones for that group. These conditions can range from interpersonal behavior and skills, to organizational culture, or simply to the history of feelings, emotions, and critical emotional incidents that the members of the group share. Some have referred to these contextual conditions as the emotional climate or mood within the team. So, in other words, if the team members feel and share emotions to the point of acting them out in a synchronized way, all the behaviors and actions that result are oriented, like iron filings attracted by a magnet, to a collective act: fulfilling an order, launching a new product line, influencing the organizational culture, implementing a process-based organization, or just being the number-one company in the industry. Klaus, believe me, if team emotion exists, the possibilities are endless. "But why am I telling you this? You can already feel it, can't you?" Klaus's face lit up like a Christmas tree; a million points of light sparkled in his eyes. I had struck a nerve. My enthusiasm was contagious and so was his. As he scrambled for words with which to reply to my explanation, I could feel a sense of emotional synchrony beginning to emerge. Klaus's head bobbed up and down in slow motion and his face was still fixed and pensive when he said, "You know, John, team emotion is the exact concept I have been looking for, for a long time. page_35

Page 36 Something is missing in our organization. In addition to processes, organization, technology, and leadership, which we are starting to address, we need to have team emotion! Can you give Martin a presentation about what team emotion is all about?" "Well, Klaus, it seems like our journey of discovery has just started, and we will have lots of opportunities along the way to talk about team emotion, you and I. But it is important that we don't mistake this idea with yet another buzz word or thing—an it that 'we need to have' in addition to process-based organization, technology, and leadership. Team emotion is a way of being for successful organizations that were visionary enough to create the necessary conditions—with technology, with processes, and with people—to allow team emotion to emerge, for groups of people that were placed in work teams or cells to become real teams, and to produce the results that everyone expects. We cannot present this to Martin just yet. I shared team emotion with you now because you, as an HR person, have an affinity for this sort of thing. But Martin expects results and not theories. To be handed a recipe for success now might not be enough for him. It would be like asking the chef of this restaurant to explain the preparation of these crab cakes before we even try them. I suggest we let Martin see some positive business results before you tell him why and how we got them. Agree?" "I understand what you say, and I agree," said Klaus. Now that I had mentioned food, we both fixed our eyes on a plate of crab cakes the waiter had discreetly placed on the side of the table so that he would not interrupt our conversation. As we both worked at finishing the appetizers, Klaus was writing on his notepad a list of questions about team emotion for which he was curious to know the answers. Especially since I had suggested that he present to Martin the recipe for successful implementation of a process-based organization here. A lot had to happen before his presentation made sense to Martin, but he was already preparing the road. "John, thanks for taking the time to explain team emotion, and here is my list of questions for when you have a few minutes to respond." Klaus handed me yet another page ripped out of his notebook. "Don't worry, Klaus, we'll continue to figure this out as we move forward with the project. You will find that the lived page_36 Page 37 experience of team emotion is worth thousands more words than any picture representation of its theory," I concluded. Klaus's List of Questions about Team Emotion 1. What is "team emotion," and how can we become a team? 2. What constitutes a successful team: productive, effective, harmonious? 3. What makes some teams better than others? 4. Why is team emotion important to change? 5. Why is team emotion important to change management? 6. How do we know when a group is emoting as team? 7. When is team emotion desirable? And when is team emotion undesirable? 8. Why do teams and managers need to be aware of team emotions? 9. What can management do to help individual members cope with or reinforce team emotion? 10. What can the group do to help itself, as a team, cope with or reinforce team emotion? Defining the Strategy The meeting with the company's directors on Friday would be a decisive one. The goal of the meeting was to agree on objectives and develop priorities for change within the company. I had prepared an agenda for the meeting on my laptop, and I planned to present it that morning. Martin found me in the meeting room. "Good morning, John. I suppose we will get out of here today with a working plan. The other day's meeting was really stimulating, but I need to see action."

"Of course, Martin," I answered. "I have the same urgency. What we did the other day was to define the situation in some critical areas that immediately relate to our competitive position in the page_37 Page 38 market. Today, I'd like to connect those factors to our position in the industry, and to size up our competitors. And, as if we were in a battle, we will employ our best weapons—that is, those that our competitors cannot imitate in the short or medium term. Then, we will develop an action plan." "Okay, John. I'd like to ask you something else before we start. In terms of the political positioning of our change project within this company, and just to draw an analogy, what should be my position toward any director's doubts or opposition to changes? Should I act as a dictator, or as an ultra-liberal democrat?" "In my opinion, Martin, neither of these extremes is good, but the answer to your question lies somewhere in the middle, and it varies with the situation at hand. The change project should be managed like a directed democracy. That is to say, you should not force them to do something, but you should not allow them to do as they please either, just because each of them assumes to be in full charge of a department (which they are, to a certain extent). A director is responsible for a certain function, but this function affects the entire company. And you, Martin, being responsible for the whole company, have the power to veto, provide the vision, and decide the direction to follow. More like the captain of a ship in an extreme situation, even when there is no agreement amongst your crew—you listen and then take a stand and decide. Once a decision is made, your crew's duty is to follow you. This is, of course, a continuous balancing act where, if a situation is not resolved, you might end up losing your position of director or president of this company." I finished getting my things ready while the rest of the group entered the conference room. Fridays were always more inviting than Mondays for presentations, except in the afternoon, when the majority of people were already thinking about the weekend. Tactics and Strategy Martin started the meeting by addressing the directors group. "Good morning folks. I believe that the Monday meeting was very revealing for all of us, and today I'd like to start outlining a concrete plan of action. That is why I asked John to be here and help page_38 Page 39 us in the process. The responsibility of reaching expected results still depends on us, the company. On Monday, we talked about concrete situations within this company that affect our competitive relationships with clients. There are many innovative ways to solve these problems, and all of them are strategic, but intimately connected to tactical matters. "To use an analogy, suppose we needed to have our car serviced and even have some parts replaced with much more sophisticated technology. Then, we would have to drive our car to a specific destination. And depending on which kind of roads we chose—either country, mountain, or city roads—we would know whether or not technological changes introduced in the car would be justified. Different technology would be needed in each case. If our strategy was to drive our car along winding roads, for instance, we would need certain technological conditions (tactics) that differ from those needed for a straight road. When designing a strategy, it is useful to have someone who knows about the required tactical tools, working in parallel to strengthen our strategy. "Why am I telling you this? Because many companies design their strategies without knowing which tactical tools can help reach their objectives in a certain period. In addition to this, tactical tools such as technology and processes should not only be known in their technical aspect; it is also essential to appropriately test whether human and cultural factors within the organization will enable their successful application. It is obviously much more important to define the strategic way. That is the big decision. But even an excellent strategic decision can lose all its value unless it is combined with a pragmatic executable implementation plan to improve key activities within the company. From the combination of the best strategy and an

innovative adoption plan of competitive advantages emerges a mix that allows companies to move ahead from their competitors. Strategy and tactics must operate synergistically, and their interaction must be clear before the first implementation steps are taken. Proof of the effectiveness of this synergy is when the whole organization witnesses how strategic goals consolidate with best-in-class tactical tools ('best' in this case refers to the most competitive tools for the company) to achieve our goals. Defining a good strategy without adequate tactical tools page_39 Page 40 is like driving a model-T car at a Formula One race. If, on the contrary, we know we can count on driving a 21st-century car for the race, our vision of the road (the winning strategy), will be different and more aggressive." "Your analogy is clear," commented Robert. "But what are 'best-in-class' tactical tools? And which are they?" Robert's concern seemed to be shared by many around the table. "I understand your worries for several reasons, Robert," I replied. "In the first place, we are using a series of words that are in fact synonyms and this can be a bit confusing. For example, if we consider the factory, the expressions worldclass production, lean production, just-intime, reengineering , and quick response are equivalent in relation to techniques used for improving effectiveness/efficiency. In administrative departments, world-class management, lean management , and reengineering are expressions that are supported by similar techniques in order to be carried out. In addition to these synonyms, businesspeople are exposed to buzz words such as ISO 9000 and total quality management that are connected to a certain extent to corporate competitiveness. "When we talk about using the best-in-class tools, we refer to the identification of management techniques (structural, functional, motivational, etc.) on the basis of a strategic analysis of our products and services in relation to our competition. These tools should, in the very short term and at very low costs, satisfy our strategic objectives. These tools should also be looked at simultaneously and in a mixture in which processes, technology, systems, organization, and the corporate culture coexist harmoniously. In addition to this, as you know, the main work of managers is to adequately allocate the company's working material and human capital. I would also include within this definition the adequate allocation of the company's intellectual capital. This means not investing human resources in tactical tools that raise the costs of strategically planned goals." Martin jumped into the conversation. "To help illustrate John's point, I'll present a situation we are experiencing in the company right now. A strategic objective was outlined, and we decided to invest in an information system exclusively as a way to reach that strategic objective, even when there were other tools available at page_40 Page 41 lower costs that would have enabled us to obtain quick fixes in the short term." "Exactly," I replied. "The same would happen if we invested the company's intellectual efforts in, say, an ISO 9000 project. Then we would need to focus on other things, or vice versa, if we decided to implement an activity-based costing (ABC) project because we were ignorant of the real costs instead of implementing in parallel an ISO 9000 project due to nonnegotiable critical requirements from external markets." "I understand that this gets even more complicated when, based on the outlined strategic objectives, we have to choose between alternative tools that aim at similar results, which is

not the case with ISO 9000 or an ABC," added Martin. "Obviously, if there are equally effective tools that meet our needs, then adopting the lowestcost and fastest-implementation tool gains importance," I replied. "Would this mean that a 10 percent reduction in personnel is superior, say, to the cellular (PBO) concept you mentioned earlier because results are obtained at lower costs and in shorter terms?" asked Martin. "No, evidently not, unless the total analysis points us in that direction. But I doubt it because when we talk about lower costs and shorter terms in one approach, we should assess the impact on the harmonious organizational system that involves processes, systems, and people. Abrupt reductions of personnel would likely affect another valuable asset: people, because the downfall in morale and having to motivate them afterward would cost us a lot more," I replied. Restrictions on Total Quality "What do you think about using Total Quality software as tools?" asked Arthur. I replied, "We should look at what has happened in the world with Total Quality software. According to study reports, the majority of this software has not yielded acceptable results. This leads the company to conclude that it has made a great effort in page_41 Page 42 spite of not reaching desirable practical results. But please don't misunderstand me—some of these software packages are very good, but the organization's management, business processes, team structure, etc., were not prepared to take full advantage of the tactical tool, no matter how sophisticated it might have been." "But it seems reasonable to start implementing a change by using Total Quality software as a stepping stone to motivate people within the company, before getting into some pragmatic matters," commented Martin. "Apparently it has been a successful motivator in some specific cases, but according to my experience, it varies from company to company. I have witnessed change efforts in some companies that started with personnel motivation using Total Quality Management, which were followed some years later by more pragmatic changes in processes, but their results were not dramatically improved. Other companies started the change project by making an important effort to communicate with employees, taking special care of the human aspect first. They then implemented adequate tools that allowed them to obtain good results within a short time and at low costs. These tools combined aspects related to organization and processes. This second alternative makes the change process shorter, adaptive, and with longer lasting effects: there is even less anxiety on the part of the workers, and results are obtained even sooner." "Can we have more employee commitment in the second alternative than in the first?" asked Arthur. "Sure. Basically, when you just talk to people and ask them for their support, they are more willing to say yes to your words and then behave as they please. But if people are expected to produce specific results such as work in a team within a cell, share knowledge and information, and be generous and collegial with co-workers and somebody agrees to make changes, this agreement (as well as his/her disagreement) will be revealed in that person's immediate behavior. In the case when expected behavior and results are spelled out clearly, it is much easier to detect conflicts and act to resolve them just because the problems are more noticeable. That is why it is very important to understand the emotional dynamics of each group or work cell. The Japanese say that in-process parts in a factory hide quality problems. It is similar with social systems: We might say that page_42 Page 43 when the organizational in-process conflict is exposed and the team or cell is prepared to cope or reinforce these concepts (not all conflict is bad), problems tend to disappear. In other words, when barriers to productivity are visible, the system tends to self-correct them

naturally. All we have to do is try to condition the best possible initial context.… But that's enough of me talking for now; we have a meeting to run, right Martin?" Defining the Difference "Yes, of course. John if you agree, let's get the ball rolling. What is the first thing we have to decide?" asked Martin. "First of all," I replied, "we must go over the aspects in which our competitors are superior to us, such as the production speeds we discussed on Monday. Their delivery lead times are also much shorter. In prices, their prices are lower than ours. They have a similar post-sale service approach, but their variety of products and parts is much smaller than ours." "Yes, I believe that variety of products affects our production costs," commented Arthur. "The factory is plagued with short production series. I feel that I am losing more time in setups than in working productively. So if we are not very competitive in prices, we should seriously rethink our product lines." "Do you mean rationalizing our line of products or our variety of parts?" I asked. "I think that what we have is an excessive variety of parts. I suggest rationalizing them to gain more space for different products, without so many setups." "That is possible, John," commented Arthur. "Actually, at the beginning of this year we started working on this issue and I gave instructions to my factory supervisor and to my engineering supervisor to come to an agreement on this. On one hand, the idea was to employ already-produced parts in new designs. And in case this was not possible because a new part needed to be produced. We had to consider the current capacity of our machines so that in case some machines were too busy, we could produce simple parts, such as rims, in the transfer lathes. This should also be taken into account in the design group in order to page_43 Page 44 determine if a new part will create a bottleneck in the part's production process." "Okay, Arthur," I replied. "It is always positive to rationalize parts. But can we rationalize an entire product?" "I don't think so," said Robert. "Our competitive advantage lies on our diversification of products. Our clients know that we visit their companies, we study the end-products they want to manufacture with a numeric-controlled lathe, and we either recommend to them one of our products or design adaptations of off-the-shelf models with the help of Engineering, in accordance with our client's needs. Unfortunately, some very impatient clients who need to launch their products in the market quickly. These clients usually choose the more conventional products offered by our competitors, even when they are of inferior quality, because they can be delivered faster than ours." "Okay, this implies two things," added Martin. "First, we cannot go against the market. That is, if the market asks for a modified line of products, we cannot reduce our line of products just to keep it at more competitive price ranges. We must meet the demands of the market or get out of the business before the market pushes us out. Second, if we can do this and deliver products faster at the same time, we will have a concrete advantage over our competitors. Having an ample line of products that meets customer needs and fast delivery would be a winning combination virtually impossible for our smaller competitors to copy." "Your reasoning is clear," commented Arthur, "but I still think that the rationalization of parts would not be enough to keep diversification of products at competitive prices (and costs)." Efficiency in Short Production Series "It is true," I replied. "Improving the efficiency of short production series involves acting structurally on several sectors of the factory by reducing setups. For example, if before it took us an hour to change the mold in a press to produce 1,000 parts and now we need to do two different series of 500 parts at the same time, the setup should take us no more than a half hour each." "I don't think this can be possible," commented Arthur. page_44 Page 45

"I think it is possible, Arthur, and a great number of companies have done so without incorporating great technological changes to machinery, but I propose we continue with this after the meeting." I wanted to get us back on track. "To improve short series efficiency, we should work on other aspects of the factory as well, not just setup. For example, with respect to personnel, Frederick W. Taylor's concepts are still being applied today where there is factory operation specialization by machine, based on the production of great quantities of different parts. We'd need to reverse this concept so that there is specialization for efficiency in production of specific parts, but not per machine . This would help us increase productivity of short series for certain types of parts." "John, I really can't imagine how you can do that," commented Arthur. "Well," I argued, "because the diversification of products generally increases factory operational complexity related to production programming and control (since we cannot have shortage of stock or increased lead times), we are forced to introduce structural changes in production programming and control to match the requisite complexity to ensure the continuous synchronic flow of parts throughout the factory." "I don't disagree with you," commented Arthur. "But what worries me is that, like we said on Monday, there are limitations in our MRP system ability to improve production flow. That is the reality of my world of manufacturing." At that point Martin jumped in, "I see both sides of the argument, but we should keep in mind that the company is not just the Manufacturing sector. If our strategic objective is delivering a wide variety of products and delivering them fast, we must reduce administrative and commercial times as well, which are a part of the order-production-delivery cycle. Also, the complete order—credit—billing—factory-programming—collection cycle should be revised. Unless we take a holistic view of the process, we would be making a big effort in speeding up the Manufacturing sector and no efforts whatsoever in other parts of the company." "Martin, you are absolutely right," I said. "And to add something else in the mix, the concept of 'speed' should also be extended to the distribution chain, the branch offices and external page_45 Page 46 distributors. You cannot afford to have one of the branch offices or distributors run out of stock, for example. The chain is as weak as its weakest link, no matter how strong we can make the other sectors by overstocking branch offices, as we do now: The chain is still weak." The directors around the table looked concerned by the dilemma being posed to them—the compelling simplicity of the arguments for change that I presented against the complexity of getting a dinosaur of an organization to turn around on a dime. Coupled with the day-to-day tasks of running a business, the responsibility to become strategic while operating tactically in their own areas was a realization that justified the stern look in every director's face. Martin also sensed the emotional climate in the room going from casual, detached interest in a new management strategy to one of profound concern about the company's business, with a healthy hint of personal insecurity. The timing was perfect. A Simple but Deep Vision Martin saw the opportunity, and he took it. "Folks, I have the impression that even though we still have doubts about how to do these strategic things, we agree that we should evolve into a company that is recognized in the market for its services (product variety, prices, and customer service) and mainly for its excellent delivery time, both of products and of spare parts." But I have some doubts, and I want to share them with all of you now. All these new approaches, in fact, mean more productivity and efficiency. What is the message we should give to our people? Will we have an excess of personnel? Too few, perhaps? Do we have the right skill sets in the right places? In other words, what is the impact on our human resources and intellectual capital?" The group was silent and their mood was reflective. After a few awkward seconds, I took the opportunity to put Martin's doubts or concerns in the perspective of the change management process, and also to dispel any hopes that Martin may harbor of trimming payroll budget as a by-product of this exercise. He cannot afford to jeopardize this effort by getting some quick up-front page_46

Page 47 savings at the cost of the long-term benefits of this strategic realignment. Management is so predictable, but I understood the temptation. I was 'there' myself not too long ago. "Okay. I feel the need to say something: I believe that what Martin just raised is a very critical issue, and one we need to consider carefully," I tactfully interjected. "If we intend to introduce significant changes in current operation and can offer outstanding service to our clients at better prices, exceptional delivery times, etc., keep in mind that all services are rendered by people. Your employees cannot feel resentful, demoralized, or inhibited, or be afraid of being dismissed. They must be emotionally stable as a group. That is why we should avoid, as long as is possible, thinking that a consequence of the change will automatically be a cut in personnel. That is why we need to talk about the sense of growth and development that the whole company is undergoing as a result of these changes. Yes, we should think about more products and services and how to add value for clients, employees, and your company. It is critical even at this early juncture that we think in terms of the growth and development of the company and all its assets—not just profits and costs, but also human and intellectual capital as a collective. "I don't want us to fool ourselves into believing that there will not be changes at the personnel level: As the new process-based organization is redesigned and shaped, directors and managers will evolve into leaders, and skill sets will shift from functional units to teams and work cells and in some cases will even face obsolescence. Providing training to our employees will be just as important as the individual's willingness to learn new business roles. Workers will become business leaders, and directors and managers will become people leaders, coaches, and facilitators." My words carried a message of hope. The change process with regard to people sounded logical and fair. Yes, there was a possibility of having to let some people go, but there was also ample opportunity for those who desired to stay to learn and grow with the organization. And although Martin's question still lingered in the room, directors were regaining their voices. "Today the company is leading the market and has the largest market share, despite difficult competitive conditions. It is impossible to grow even more," said Robert. page_47 Page 48 "I am not saying that the company is hurting right now, Robert," I said. "But I think it is possible you can lose market share unless there is growth in products and services related to your main product." "It is possible to grow more," said Arthur. "At the factory, when we had a big decrease in sales, we thought about several alternatives to continue our revenue flow in spite of sluggish sale volumes. One was, for example, to allow clients to return our equipment after use, recondition it, and offer it back to them with a written two-year guarantee. Another idea we had was to repair important parts, such as headstock, instead of complete products, and provide a manufacturer warranty." "I believe it would be a good idea to go deeper into all these concepts," added Martin. "We can consider these ideas and others as leverage to the production knowledge and experience in this room. I believe that we are defining as a management team clear direction. If you allow me, I would like to summarize it like this: Achieving a competitive difference in our company means (1) our clients' specific functional needs should be satisfied through both our standard production lines and special features through on-demand production of short series, and (2) product manufacturing should be accompanied by the definition and execution of all the related processes discussed, and improvement in customer services. The incorporation of these new strategic concepts requires choosing management tools with short-term tactical scope that lowers operating costs and considers the entire company's processes, people organization, and information systems. This will allow us to achieve the fastest production and delivery of those products and services at a low cost, with competitive prices for the value received and with the best customer service in the market. We might not be the cheapest out there, but customers will pay for our high-quality products, superb functionality, fastest delivery, and best-in-class post-sales service and support."

The management team seemed on board, and although everyone felt they owned a piece of the responsibility, no one doubted who was in charge. I was proud of Martin's performance, his firm command of the project, and his determination to change, as well page_48 Page 49 as his openness to new ideas and risk-taking by his management team. I also felt good about the roles I was given to play in the project: To Martin, I was a friend and confidant; to the directors, I was more than just a consultant—I was a source of experience and knowhow, and at the same time, I was someone who was deeply concerned about the company's future, the employees, and their personal success as executive leaders. Starting the Communication Plan "I believe that as a first step, we should give this project a name to start materializing our vision. Any ideas?" asked Martin. "I like Da Vinci ," replied Robert, "because the project is reminiscent of Leonardo's creativity and innovation, and also requires an integral knowledge of all the areas that are necessary to obtain business results. As John pointed out, it is a true renaissance effort." Susan had a different idea. "Building on Robert's idea of art and the renaissance, I'd suggest Picasso , because apart from the evident creativity of a more modern period, it reveals the 'transgressive' style we'll need in order to succeed. If I understood John correctly, we need to be structural transgressors to achieve a competitive advantage." "I see the rationale behind Picasso and Da Vinci, but I really like Union ," commented Arthur, "because a kind of union of all the members of the company is needed to achieve these objectives. Besides, I distinctly heard John say that the work cells represent a union of most, if not all, business functions aligned by process." "That is a good one Arthur, but the name I like is Phoenix ," said Peter, "because this company needs to rise from the ashes of a traditional organization to transform itself completely." "I like Human ," commented Klaus, "because human resources are the foundation of our project. Remember the brain analogy and the cells as neurons in total synchrony? Although I can see where the other names are certainly very applicable." As the meeting facilitator, I felt the need to step in. "What a keen observation, Klaus! If I didn't know better, I'd say you are an HR person, aren't you?" I drew a laugh from the group who page_49 Page 50 immediately realized that they were still attached to their own functional "silos." This was evidenced by a flurry of comments among the directors praising each other for the name selection and the wittiness of their accompanying remarks. Martin, the diplomat, stepped in once again. "I really see the merits, like Klaus did, of all the suggestions, but one in particular I feel captures the essence of this project," said Martin. "I particularly like Phoenix , because I believe we will need a great dose of creative destruction, as Peter said, to transform the entire company. Starting with all of us around this table—except for John, of course. We'll let John be an enzyme!" "Well, that's it then. I believe the group has already decided," added Klaus in jest. "We will never contradict our boss!" At that instant, a red light went off in my head, and I felt the need to say something about Klaus's comment. Based on a conversation that Martin and I had weeks ago, before all of this started, apparently the culture of this management team is that directors don't disagree with their boss, Martin, often enough. Instead, they discuss critical issues outside the regularly scheduled meetings, when he is not around. This fear of the directors to confront Martin with business realities has lead to sub-optimal decisions being made by Martin in the past, a situation he wants me to correct. I saw the opportunity to make a point.

"Okay folks. If I am going to be the enzyme of change here, then I should tell you that I don't see much disagreement in this group anyway, but I can't yet put my finger on whether that's good or bad…I'll let you decide about the merits of conflict in teams, and we'll leave that discussion for a later time. For now, if you don't mind, I'll use Phoenix as the official name unless people tell me otherwise, right now in this meeting or at a future meeting just like it, with this entire group present." There were no takers for my challenge, and instead everyone was complimentary of Peter's selection of the winning name. I let it slide by, knowing it was too early to engage the team in that kind of team self-reflection. But in due time, I would. As Martin and I exchanged a knowing glance across the table, Arthur brought the meeting back on track. "There is something that really worries me. We are now starting the most active period of work in the factory. I don't think it page_50 Page 51 would be a good time to design this change, because my people will be very busy. It is not possible for us to have people working on a parallel project. There are not enough people to do the work. "I understand your position, Arthur, but this change project has the highest priority right now," replied Martin. "And we have to be able to do both things at the same time: execute our production plan and follow the timeline of the change project. Didn't you mention Da Vinci before? Well this is one of the ways you need to get creative, Arthur; use the power of and , not or . Give it a try. I'd like John to work with you on your part of the project. I believe that with all the elements on the table, we now need an act of faith. We have to believe in this change. Let me tell you something, Arthur: Imagine just for a minute that we are generals at a battlefield. Don't you think generals have the same doubts as soldiers do about the success of a mission? But if generals externalize their doubts, what do you think would happen to soldiers? Just as soldiers, generals can't sleep the night before the battle. Nevertheless, when they speak to their troops, they exude confidence and determination. This is what I want from you when I ask you to commit on faith. Although you may have doubts— and we all do at some point deep down—you must look confident in front of your people. Can you imagine the reaction of a factory shift captain, or an administrative manager, or a warehouse supervisor if you say to them, 'It is a good idea, but I'm not so sure this thing will work.…'? People are already naturally resistant to changes. They will see each crack in the dam wall as a reason to escape. "I know that we as managers might not be entirely ready for this just now; please don't throw out the baby with the bath water, as my mother would say. I realize we must also remain loyal to our fears, but being a leader requires us to be comfortable with ambiguity and with taking calculated risks. We learn a lot in college, but I realize that nobody teaches us how to break down all business structures and still manage the business, plus our anxieties, our anguish, and our feelings and emotions. I am asking you now to be leaders, to take charge of our company, and to start attending today to the needs of the people who work for you. Start to manage your own emotions, and contribute to the emotional wellbeing of those who work for you as well. In my book, that is what leaders are all about." page_51 Page 52 I could see Klaus from across the conference room, writing furiously in his notepad. I could imagine all the questions about emotions in leadership he must have written down for me to answer at our next meeting: team emotion as it relates to leadership teams, emotional contagion across organizational structures and hierarchies, the effect emotional synchrony has on top management teams, etc. That was great; I had my job facilitated by having Klaus as an ally among the director group. He was emerging as the conscience of that group, a very fitting role for an HR person in a top management team. As I was looking at Klaus, he raised his forehead and smiled at me as if he had heard my thoughts. Then he looked at Martin, who was staring at both of us and nodding his head with approval. A bright smile illuminated Klaus's face, and I responded in kind. He knew then, without a word being

exchanged, that he was an "insider" to the Phoenix project team. The rest of the unsuspecting audience continued with the conversation, unaware of the team emotion that was starting to forge among us. "But we have to do this change project, because if we don't, guess what? Our competitors will do it for us, and I for one don't like to be playing catch-up. We need to start telling our people now so that they know what's coming down," said Robert to the entire group, and looking for Martin's approval. "Yes, yes. I believe Robert is right," said Martin. "Designing a communication plan for our employees will be a very helpful first step. So, John, how should we start the project?" It was my turn to respond. "I agree that a good communication plan is critical to involving everyone in the project. You light the torch, and the team takes it to the finish line. I'd like to prepare and share with you the different communications needed and channels of distribution that, according to your company's culture, we will use to send out ongoing progress reports to make people aware of the change objectives. I think that you, Martin, will have to take the first visible steps. It is necessary that you inform all the company personnel at the same time, in a series of face-to-face meetings, the goals we will pursue, the plan to do it, timelines for implementation, and something about the nature of process-based organizations. I like to think of it as a kick-off ceremony. Later on, once the specific processes and tools have been defined with page_52 Page 53 directors, they can communicate specific actions by department. Martin, the team here will do all the work, but you need to be visible and available to us. This is your new vision, and you are its champion!" I said that more for the directors to hear than to engage Martin. I knew exactly where Martin stood in all this, but it was critical that everyone feel ownership and accountability of the Phoenix project on an equal basis. We were all in it together, and Martin knew this. "I'd be happy to do that, John," said Martin as he looked around the group. "How does everyone else feel?" Everyone agreed with the communication plan as the first step, but then what? The directors of Administration and Sales inquired about when they could start the actual change plan. "I think that to gain time, we should start with the Manufacturing Department, and then two or three months later, extend the implementation of the project to the Administration, Commercial Sales, and Distribution departments," I replied. "Okay, John," said Martin. "Next week, you should meet with Arthur to start working on the plan and the implementation methodology. I presume Arthur will be the manufacturing project leader?" asked Martin. Arthur replied, "Of course Martin, John can count on me as well as my assistant to make this happen." Martin continued, "Robert and Susan, will you lead the Administrative-Commercial Department projects?" Martin went on, as he sensed the support and commitment of his leadership team. "Klaus, you and John should work together on the employee communication plan and on all other matters related to human resources." At that point, Peter jumped in and offered his expertise in project management. "If you all agree, I could keep track of the Phoenix project plan, report on achieved objectives and milestones, and work with Martin and you, John, as the internal project coordinator." "This all seems very reasonable. But what will my role be?" asked Martin. Martin and I had discussed his functional role in the project, but now he was looking for consensus in his team —the mark of true leadership, I thought. Klaus interjected, "I think that your function, Martin, will be the most important one. You are the champion of Phoenix. For page_53 Page 54 example, if we encounter a roadblock in the project, either human or technical, or any type of bottleneck, you will have to help us remove it or fund it, whatever the case might be."

Klaus's last remarks drew a chuckle from his colleagues, who knew well what a stickler for budgets and cost containment Martin was. Everyone agreed wholeheartedly with Klaus's description of Martin's role in the project. Martin looked pleased. Now Everything Is Subject to Scrutiny "Okay. With this vision of global change for our company, I am thinking about what is the best policy for this year's budget investments. Do we really need new equipment? Should we get the new integrated information system as planned, or instead implement the personnel incentives policy or the ISO 9000 program?" asked Martin. I had some thoughts on the matter. "One of the things you can do initially, which has worked well in other companies, is to stop all new capital investment until the Phoenix project has been scoped out better. With respect to the ISO 9000 initiative, it's a big commitment. I'd put that on hold for the time being. Some companies started to implement an ISO 9000 program along with a change project such as yours, and later realized that they had to modify structures, roles, processes, and procedures in such a way that neither project was successful. The projects were getting in the way of each other, and people were stretched too thin and started to think that it was yet another failed attempt to implement fancy management tools on a shaking foundation. For example, people thought about the abrupt changes in roles, different work-breakdown structures, reception and control processes affected by more localized warehouses, and the Kanban system changed suppliers' orders operations. My suggestion is to do the basics first in order to build the new organization on a more solid foundation. Agreed?" I asked the group. "All right," said Martin. "I think it is reasonable to wait for a while until we define how the Phoenix project affects these matters. If you agree, we can finish the meeting now. And Arthur, after you meet with John next week, would you like to explain to page_54 Page 55 the management group the working plan and the tools necessary to achieve the factory's strategic objectives?" Arthur nodded in agreement, but he looked preoccupied. Martin asked me if I could join him after the meeting for a couple of minutes, and I agreed to a short debrief. After the directors left the room, I sat next to Martin. He seemed tired, but happy. "Now that we are alone, John, what do you think about the directors' reaction to this meeting?" asked Martin. "I think that their general reaction was good, considering that it is human nature to be resistant to change, even at their level. But there is something important we need to stress, Martin: Directors don't have to see this project as something that threatens their positions of authority, because they will lose some of their executive power as they know it today, and the increase in their people power and influence might not be obvious until the results from the changes speak for themselves. It's the paradox of change that causes what I call 'schizoid incoherence' in the leadership ranks. "We need to be prepared to deal with negative team emotion and work as a group to cope with it, and to reinforce areas of positive emotional synchrony and resonance. With your blessing, Martin, and with Klaus's assistance, I'd like to start coaching your directors on specific leadership behaviors so that we help them get by these difficult moments of doubt in themselves and the process, and can in turn support their own direct reports to get through this transformation. I've seen it happen before, and directors with self-doubt are the numberone hidden cause for the failure of many change projects. By the way, Martin, Klaus has impressed me a lot with his understanding of the magnitude of what is going on here in terms of team emotion and the human drama associated with leadership transformation and organizational development. I'd like to have him as my co-pilot in this project; you will need someone after I leave with the necessary skills and method to grow and nurture the sociotechnical system that we are about to create here. How do you feel about it, Martin?" "Honestly, John, I never thought about it in that way, as a socio-technical system that grows, adapts, and requires care and nurturing, but it makes all the sense in the world. It's funny how we tend to get wrapped up with the how-to of business and the technology and forget that organizations are living entities that page_55

Page 56 have a distinct essence and a being of their own. You know, John, I think I am starting to understand what you mean by looking at team emotion in the organization. Thinking about the organization in terms of processes and work cells makes the team emotion concept a critical lens with which to view organizational strategy and leadership transformation in a very natural way, doesn't it?" asked Martin rhetorically. "I certainly believe that," I replied, "but maybe it is more than just a lens that you can put on like a pair of reading glasses and take them off when you think you don't need them. To understand team emotion is to 'be team,' so perhaps a more appropriate analogy is to permanently adopt a team emotion dynamics perspective by undergoing corrective eye laser surgery.…" A fleeting moment of silence was prelude to the simultaneous outburst of our laugh that filled the conference room and the adjacent hallways. "Seriously, I'm glad we are both on the same wavelength, Martin." "John, I have a hunch that Phoenix will be a major milestone in the evolution of this company as the premier player in our industry. But getting back to my management team and the need to help them gain confidence, what do you think I should do?" asked Martin. "It is important that you make it very clear to them how much you value their intelligence and that even though the project can modify roles and tasks, they will not lose their jobs or salaries. Just like when we say that according to the law no one can be forced to testify against themselves, it would be ridiculous to expect your management team to work effectively on a change project that might result in the loss of their own jobs. Having said that, let me add that once management jobs and their roles are redefined, you will find people who still are not happy with the perceived loss of executive power, sometimes for reasons that even they can't figure out. In such cases, we need to be open and up front about it, and help them make the right decision for themselves—even if it means they have to leave this company." "That is true, John. But isn't it better not to say anything about this now?" page_56 Page 57 "It is your decision, Martin, but my recommendation to you is to confront these issues as early as possible. Not doing so would be insincere on our part." "But can we guarantee all directors' positions?" asked Martin. "I believe so. These directors are highly intelligent people. They may lack courage in certain situations, but they can be helped. The only thing we cannot allow are attitudinal problems. Those we need to weed out—tactfully but without exception." "What kind of problems are we talking about here, John?" "Well, here are a few examples: refusing to try new things just for the sake of refusal; using phrases such as, 'It is impossible to do it any other way' or 'No one in my area is going to buy this, I can tell you that right now,' or the veiled vetoes such as, 'Let's talk about this later,' or 'Some other time, please,' or 'I'm just too busy for this.' Or even worse yet, boycotting the project, making a pilot fail on purpose, or hoping it will go away. Some people try to shoot it down quickly, while others prefer death by a thousand cuts, backstabbing, etc. Martin, I've seen them all." "Does this really happen in companies like ours, John?" "Yes, it actually does. Depending on the culture of the organization, these behaviors can be quite natural. If left unchecked, they become more visible and acceptable in the culture; they get adopted by new employees and newly formed teams that participate in these collective acts, and they become the regular mode of operation. Of course, these individual and team behaviors can be traced back to shared feelings and emotions that materialize in team emotion and the ensuing collective acts that I just described." I could sense Martin's curiosity growing by the minute, but I didn't want Martin to be too concerned with these negative aspects of change. At the same time, I felt the need for him to face up to, at the right pace, the true scale of human factors involved with Phoenix. "It is fascinating to see the human drama unfold in all of these projects," I told Martin, "and I promise that we'll chat more about these in the coming days, but now I'd really like to

discuss the actual change strategy that we outlined in the meeting." page_57 Page 58

Speed and Efficiency: Two Sides of the Coin "I agree," said Martin, "and what do you think in general about our strategic objective? Are we taking the right path to reach our goals?" "Considering all I've heard and seen so far, I think we have chosen one of the best possible roads. In fact, if you think about it, everything can be summarized in one strategic factor: time ." "Do you mean to the speed up of production time, or the actual delivery time?" "I am referring to all times involved: lead time for entering orders, order-collection time, production, etc. As we discussed with the directors the other day, time reductions translate into opportunities, and these in turn translate into profits. I like the old adage 'Time is money.' It's true for us as well. If we are fast in executing all our processes and we produce short manufacturing series, we are on the right track; that's why the most sophisticated companies prefer this strategy. But, paradoxically, we need to be both faster and more efficient, minimizing errors. As you know from experience, Martin, the faster you move production, the more errors you are likely to have. Now if we look at speed holistically for the entire operation, we can realize speed reduction in areas where it is more feasible, while concentrating in error reduction strategies where it makes more sense. And we can do this by deconstructing the current functional organization, making all problems visible to the team, rebuilding for speed and efficiency at the process level, and letting nature do the rest." "But wait," said Martin, "I followed you until you said the word nature . What's nature got to do with business strategy?" "Right, right…Let me slow down a bit. Just like we talked earlier about feelings and emotions, and that team emotions are natural, individual, and human collective tendencies, business processes need to be 'organic' and not 'mechanical.' We need to design sustainable processes that will work today, tomorrow, and the day after that—in other words, processes that will be owned and operated by work cells and business managers and that connect dynamically to other work cells and business processes, as well as carry the operation of our business forward into the future. To achieve this, we absolutely need to have an organic design page_58 Page 59 where there is not only speed and efficiency, but also a high degree of group creativity and innovation, ownership of problems, and a self-imposed accountability for the well-being of the team members. That is what makes the approach to change we'll use in our Phoenix project so unique. Does that make any sense?" "Yes, of course. I think I understand this process-based organization concept at an intuitive level. But John, getting it done and having it work well are what should differentiate Phoenix from all the failures that I've been reading about in periodicals," commented Martin. "Yes, I am basically referring to exactly that issue. If we want a quick and nimble company, we should start now looking at how you and your leadership team work together to implement Phoenix, because if we can't even manage the change program efficiently and fast, what hopes do you have to be able to manage a sophisticated company based on processes and human qualities? The challenge started Monday, and the change process, in case you haven't noticed, is well under way. We, the Phoenix project team, mainly your direct reports, are the working prototype—the DNA for all other work cells to follow. If something doesn't work now in the Phoenix project team, we cannot let it slide. We must detect it right away, make it visible to all, and allow the team to self-correct its course." "There is an important implied premise that is perhaps counterintuitive, judging by the way we've been running business enterprises for a long time now: People by nature want to do the right thing. All we need to do is show them what isn't working right, uncover hidden mistakes, give them the means and opportunity to correct it, and help them along the way.

That, Martin, in my book, is the natural thing for a leader to do." The Airline Story "Yes, yes, I agree," said Martin. "I remember the story you told me some time ago: If I decide to travel through ten states in two days, using the same airline, everything should work perfectly. Planes should be on time, luggage should not be lost, there should not be mistakes on the tickets, etc." page_59 Page 60 "Yes, that's true," I replied. "In that case, if our required lead time for the trip is two days, any failure resulting in delays would be noticeable. This would give the chance for someone to correct things. What I am going to say might sound a bit obvious, but I think it is very real: No matter how much effort we put in correcting mistakes, we cannot correct those that we don't see or are hidden from us. The airline story, for example, illustrates speed as a strategy, but I've encountered many real business situations where variation of the speed and efficiency were used. If you have time, I'll share them with you." At this point in our conversation, I realized that Martin was becoming passionate with the topic of change, the methodology for change management, my assessment of his management team, etc. This project was an important decision for Martin, perhaps the one that would impact his future as a business leader. I understood this very well, so I decided to give as much of my time as he was willing to invest in exploring all his doubts. We got on our cell phones, cleared our calendars for that afternoon, and continued the conversation. This early in the project, my time was entirely his. The Textile Company Strategy I continued with my examples. "I remember a change project I implemented for a textile company about two years ago. The company president was worried because imports of lower-priced foreign products were increasing. Their strategy was not only to compete on prices, but also on services. At the time, they had a variety of fabrics offered in approximately 40 colors. Their strategy was to double their color offerings by launching them in groups of 20 over a period of one year without any increases in their operating costs." "Why would they do that?" asked Martin. "For two reasons," I replied. "First, because they wanted to attract their clients with a wider selection of colors, and second, they wanted to beat foreign competition with faster production/delivery times. For example, when a salesperson visited clients it was better to present new color and new designs instead of the same collection over and over. This was very attractive—not page_60 Page 61 just for clients such as clothing factories, but also for wholesale distributors. They were targeting the weakest point for importers: their slowness and lack of variety." "As a businessman," said Martin, "I can understand a lack of variety. If I were an importer, I would have to import a certain economic quantity of goods due to differential costs of freight, and I would bet on best-selling colors. Why? Because, if people don't like them, I cannot economically return them to the foreign factories." "Yes, Martin, and the reaction capacity of an importer is an obvious time factor. Administrative processes, freights, and foreign factories' response time all translate into added costs. This also increases process complexity, so the foreign company's ability to respond to demand is inferior to that of the local company." "And what about other local competitors? What was their situation?" asked Martin. The Automotive Parts Company Strategy "Practically the same," I replied. "Allow me to illustrate with another company I consulted for five years ago. I prepared a change project for a local automotive spare parts company. They were the original parts manufacturer who sold their products to automobile assembly plants. Their strategy consisted of reducing costs and adjusting to increased demand; that is, the company was getting a flurry of unexpected orders in both variety and quantities of

parts. Their problem occurred frequently when their customers, the automobile assembly plants, did not freeze their production plans for a period of time that allowed the spare parts manufacturing company to forecast production; therefore, they received new orders they were not prepared for." "I suppose their solution was not to increase the volume of stock of finished goods," said Martin, knowing the economic implications that carrying excess factory inventory entails. "Of course not," I replied. "You know better than me that to do that would have been detrimental to their business: They would have had to increase their working capital, which would impact the company's bottom line and prevent them from offering the page_61 Page 62 improvement in customer service they were hoping for. No, that was not the answer to the problem. If they were going to increase stock to solve the problem, they would have had to become better estimators, but that entails lots of guesswork that is usually wrong anyway. No, they had to find a better production strategy to meet their customer demand (not the old stock-replenishing strategy using economic reorder levels). A better strategy was to make the company's manufacturing and delivery capability quick enough to lower lead times from 40 to 10 days, and in doing so, produce the parts on demand and not against stock levels. This meant that with a 10-day lead time, they could afford to modify manufacturing orders on-the-fly, and produce all parts just at the time they're needed and in just the quantities requested." "Okay. But how was the company's condition at the time with respect to competitors?" asked Martin. "I have to answer that in two parts, because their competitive situation in supplying automobile assembly plants was different from their situation in relation to spare parts distributors." "And which was their most profitable business area?" asked Martin. "The spare parts business, certainly. The margin on a separate spare part is higher than if that part is included in a sub-assembly. But in answer to your question, I would say that with respect to assembly plants, the company was the only supplier in the country, so it had no competitors. Even though there were competitors from abroad, auto plants preferred the quick response of the local national company." "That's logical," Martin responded. "If I was the purchasing manager of one of these companies and my job was evaluated in terms of provisioning (and levels of stock) apart from costs, I would make the same decision, even if the local prices are higher. And this is because a decrease in sales due to our not completing a final product because we didn't have the parts would cause a delay in receivables. And relationships with clients would also be affected." "Yes, that's right. But in addition, remember that the company had local competitors in the spare parts market. Five years ago, the company's market share was ridiculously low, being an original page_62 Page 63 equipment manufacturer (OEM). What was the problem? Small companies with fewer than 10 machines delivered short production series of a certain spare part to distributors in much less time. The OEM company, due to its sluggish structural inertia, could not do that; therefore, it took longer to deliver spare parts (30 to 50 days) because orders for spare parts were constantly getting bumped by high-volume and higher-priority orders for the assembly plants." "Yes. It is totally understandable why the company had such a small market share in spare parts," said Martin. "Imagine you were a client and you went to a spare parts distributor to look for a certain piece for your car and you were told, 'I am sorry, sir, we don't have the original piece, but we have this one, which is very good although not an original, but it costs 10 percent less.' Would you continue looking for the original part?" Martin was pleased with his own knowledge of the auto parts industry. This was very good, because the concepts I

was teaching him on PBO strategy were easily transferable from one industry to another, and he could quickly find application to abstract ideas around time and efficiency to process strategy. "I suppose not," I replied. "That's why, when they implemented a structural change in that company and production cells were formed at the factory, an intermediate Kanbans concept was applied to the entire manufacturing process. That way, they were able to deliver spare parts in under 10 days—something that was unthinkable with the old approach. The company doubled their market share in less than six months." Two Sides of the Coin "Okay, John. I think that speed is one side of the coin—how speed increases your market share. But tell me again—what is the practical relationship between speed and efficiency?" Martin asked. "Do you remember the textile company I told you about? To increase speed, the change process had to be more global and needed to involve both the factory and the administration areas. For example, in the case of the Administration and Commercial page_63 Page 64 departments, one of the structural changes involved the formation of cells or minicompanies. One of the indices used to evaluate the cells was time to respond to clients' orders—how much time a clients' order took, from the moment it was placed until it was delivered by the factory. To achieve this, it was necessary to implement changes in the company's information system to compile statistics and other data. The structural change involved the Office and the Manufacturing sectors. Before, when their lead time exceeded 20 days, dead time in the process went unnoticed. Delays and time buffers between operations helped hide the inefficiency of some sectors. Nobody knew, with a few exceptions, why it took so much time to deliver an order to a client. Production Planning, for instance, might have made a mistake and corrected it before anybody noticed. The same thing might have happened in the Manufacturing sector with respect to reprocessing due to manufacturing mistakes, or in the Administrative area due to mistakes in activity coordination, or in the Commercial area due to mistakes in payment terms and conditions." "Okay, I understand," said Martin. "According to what you just said, the main problem is not related to the existence of inefficiencies, but to the fact that these inefficiencies go unnoticed and that no solutions are proposed that address the whole process." Martin appeared enthusiastic about the idea. Time: The Driver of Continuous Improvement "That's exactly it," I replied. "On one hand, when the company reduced lead times that way, it implemented a deeper change—a process-based reorganization. This also meant an implicit change in efficiency, which accelerated the next step: a continuing improvement based on measuring lead time against established parameters." "I imagine this means not just measuring, but also taking actions," pointed out Martin. "That is right. At a continuing improvement meeting held by each process-based work cell, they analyzed, along with other process indicators, the response time to clients. Time was the page_64 Page 65 driver of the meeting. Then, the team analyzed delays in delivery. Since all the representatives of the order-delivery-billing and collection cycle were present in the meeting, they knew what had happened and where problems existed. For example, they knew that the delay was caused by a factory problem, because a product hadn't been given the average five-day lead time at the factory. Or they learned that there had been a coordination problem with the factory, because the cell had sent the order to the factory with a delay. By diving into the problem, they discovered that the coordination had failed because the product appeared as 'in stock' when it was not. This moved them to revise the stock system loading and downloading, thus avoiding future mistakes of this sort, which were the main cause of

problems. (Later, on the basis of a mature working process, they incorporated bar-codes.) Continuous improvement meetings like this one, at the cell level, were held weekly in order to perfect, adapt, or change as needed the process for that cell." "So the work cell is, logically, the future of quality circles," commented Martin with enthusiasm. "Oh, I really think so, Martin. But it is even more than a logical consequence of quality circles; the work cell in PBO incorporates the idea of continued process improvement as part of its processing responsibility, not as an after-the-fact, once-a-year thing. It is more like the concept of Action Learning, or better yet, team learning in action, and while doing. This is not just another management fad artificially imposed on a social unit. Implemented in the way I am proposing here, PBO is a natural organization strategy that takes into account the human element and business results. And that's why I think process-based organizations are an irreversible trend in all industries. The sooner companies understand this and act on it, the closer they will be to the future— Martin, if you get me started, I could talk about this for hours, but let's get back to your questions." "You just mentioned 'all industries,' but up to now, John, we have only talked about industrial companies. Can this speed-efficiency strategy achieved through PBO be applied to other types of businesses and organizations, such as banks?" asked Martin. page_65 Page 66

Process-Based Organization in the Service Business "Absolutely. Two years ago, I was managing a project to transform the internal processes of a bank. If you consider it from a commercial point of view, speed produces results. Bank clients don't want to wait to receive a loan, for example, and clients of an insurance company don't want to wait to receive their policy." "Are the concepts of PBO and its tools the same in the case of a bank, an insurance company, and a factory?" asked Martin. "Basically, yes. The most important concept of the post-engineering era is the cellular concept. As the building block of process-based organizations, work cells can be implemented in service organizations such as banks, insurance companies, and credit card operations; even hospitals, colleges, or museums can benefit from PBO and the cellular organization concept. Once the basic and support processes are identified for the entire enterprise, it is necessary to reformulate its organization on the basis of such processes by forming cells that perform these processes by including all the business areas and functions that support the processes." Process-Based Organization and the Health Care Industry "I see your point," replied Martin. "How would you apply this in a hospital, for example?" asked Martin, who looked very interested again. "The philosophy is very much the same. It depends on the type of health care being provided. A diagnosis center, a lab, or an outpatient clinic is quite different from a full-service hospital where the degree of process complexity is much higher. A few years ago, I was giving a conference on productivity to a group of doctors working at different hospitals and health care centers. I presented to these doctors some of the process issues relating to time and efficiency vs. quality of the current health care organizations. For example, if we consider lead time to be the time a patient has to wait to complete diagnosis or treatment in cases of emergency (excluding ER), patients' waiting times are too long, assuming that a patient has to be subjected to different examinations before a diagnosis can page_66 Page 67 happen (e.g., blood tests, X-rays, and other vital signs checked). Time buffers between tests

and diagnostics are huge, since there is a sequence of activities where specific processes are affected by a series of moderating and mediating factors, in centralized and decentralized facilities, with specialized equipment, information systems, and transaction queues at centralized laboratories. In addition, these processes are affected by having to wait for independent doctors who assist several patients at the hospital or their private practice. All these elements result in longer patient waiting time." "And what is the solution?" asked Martin. "Wait. If we are talking about basing the organization on processes, this would mean, for example, devoting a human organization and technology to specific processes. For example, if we have identified a process related to lung problem patients, this would mean having specific technology such as an X-ray minilaboratory or other specific technological equipment. Is that it?" "You are getting close, Martin. In addition, patients' waiting times are significantly reduced and staffs at the mini-laboratories become experts in this type of patient. At that health care conference I mentioned earlier, I explained the concept of cells, speed, and efficiency, and one of the doctors came up to me and said, 'This is like going back to the basic doctoring skills when things used to work a lot better.' I agreed with him. In fact, hospitals have gone through changes similar to what factories and administrations experienced: When they grew, they thought that the best way to increase productivity was to build bigger places (bigger laboratories, nurse stations, waiting areas, etc.) where people using the same technological equipment performed the same function." "It was a good idea from the fragmented point of view of a department, but considering it from the top of the organization, it didn't address the real problem," commented Martin. "Exactly. What really matters happens at the enterprise level: the overall quality of health care, customer service, and (why not say it?) the revenues that ultimately enable what really matters," I added. "Fantastic," exclaimed Martin. "Now, how would you apply these concepts in government agencies?" The afternoon sun was starting to fade behind a group of buildings right across from the conference room. One of the directors page_67 Page 68 stopped by to update Martin on a late production run for one of their largest accounts. Then his assistant stuck his head in to wish us a good weekend. I did not look at my watch because I didn't want to give Martin the impression that I was in any kind of hurry; there was no sign of him easing up on the questions, and I was determined to share with him as much as I could. Martin pressed on. Process-Based Organization in Government I related another consulting experience. "At government agencies, it is exactly the same. Two years ago, I worked with our city mayor to define the new vision for his town hall. There are different departments at our town hall: an Economy Department, a Public Works Department, a Government Department, a Social Services Department, and other small functions." Martin interrupted me with a question: "What would be an example of a process within a governmental organization?" "An example of a process would be the bidding and execution of public works. This process goes through different departments within the town hall. The decision is typically made by the Government Department. Then the Economy and Public Works Departments prepare the conditions of the bid, and once the bidder is chosen, the work is carried out under the supervision of the Public Works Department. The Economy Department pays the bidder. Once the work is finished, the Economy Department can collect payments from the citizens." "I understand the problems that can arise from the functional division of labor within that organization, especially in a case like this," added Martin. "An example of problems might be a high lead time from the moment the public work is approved until it is actually carried out. I am sure some of the moderating factors might come up at public hearings." "Exactly," I replied. "But that is not all. As no department is totally in charge of a process—

that is, there is no process owner— there is no way to influence lead times across departmental lines. For example, if the project is excessively over-dimensioned, the Public Works Department does not feel any pressure with regard page_68 Page 69 to efficiency, because that is the Economy Department's responsibility, since it is in charge of budgets and payments. We can find many other examples like this one." "How do you make people feel in charge of the process in that environment?" "The same way a factory, a bank, or other service-oriented business does it: Have cells be in charge of coordinating the whole process, much like a project coordinator or a program office that deals with many transactions simultaneously." "Would they have cells for different geographical areas of the city?" inquired Martin. "That could be one way to do it. When some work is done in a certain area of the city, all the elements related to the bid, execution, and collection would be included in a cell. Therefore, this cell is responsible for the lead time and the efficiency of its process management; it is responsible for the relationship between costs and collection. As a direct consequence of this, there is a much more personalized service for the community, because there is a direct cellinhabitant relationship and the inhabitants of a certain area know the faces of the people within the cell in charge of that area. You could say that it is politically organized." "Nevertheless," added Martin, with a skeptical tone, "I believe that the control they used to have among departments has disappeared. What I mean is, before PBO, the departments had more control over each other. For example, if a supplier was overcharging for some work, the invoice was audited by the Economy Department, which informed the Public Works Department. In a cellular organization, who is in charge of such control?" "Well, the auditing process changes. I would say that it is simplified. You have to see the process-based cell as a black box. Before creating cells, certain conventional steps basic to process reengineering (value analysis and adequacy of information systems) must be taken. Within this black box, there can be some inefficiencies or mistakes made, either voluntarily or involuntarily. If this happens, when we measure the black box output, we will detect a problem. For example, we would notice that the cell efficiency is not good in relation to costs and income (process metrics that were already defined). This leads us to review where page_69 Page 70 the problem started within the process-based cell. This could be accurately determined, since we know who was in charge of each task within the cell. Previously, we audited the person's function. Now we audit the process. If people comply with certain standards, the process will show it. But now people have an additional motivation to be efficient. Before, with barriers among departments, any lack of productivity went unnoticed. Now, there is a sense of teamwork, accountability, and commitment that makes everyone in the cell feel responsible for the entire process." "So, what if one person doesn't feel responsible for the entire process within the cell?" asked Martin. "It is always possible that this could happen, as we already discussed," I replied, "and you will know about it right away. But most importantly, the other members of the cell will know it as well, and they are the ones who will correct it with management's help, coaching, facilitation, or even cooperative arbitration brokered by the cell leader or business manager." "I really like that, John! What you say feels right and natural . Solving their own problems is how the teams learn. Of course they need to recognize which problems are theirs and which need management's involvement, but it sounds like that is also part of the learning." Martin stopped talking for a few seconds to collect his thoughts before continuing. "…but I believe that even when the transformation into a cellular structure is technically complex, the most difficult thing still is human resistance to change." "That is absolutely right, Martin," I replied. "Resistance to change and the reaction to being changed; there is a difference, and sometimes

people confuse the two. We don't want them to fall into that emotional trap." "I'm sure you are not going to let us do that, John. Thanks again for helping us with this project, and I look forward to our next meeting." "You can count on it," I replied. page_70 Page 71 3 Redesigning the Factory That weekend, I decided it was time for some rest and relaxation— "R&R," as my American friends call it. I tried not to think about work, but I quickly lost that battle with my will—the conversations and images from the previous week's meetings kept replaying in my head. Angles unexplored, thoughts unexpressed, and insignificant details and small comments made in passing became significant all of a sudden, changing my feelings and my perspective. I must have held a dozen conversations in my head with Klaus about emotional commitment and passion at work and with Martin on leadership and the effects of team emotion on individual and group behaviors in the offices and the shop floor. These so-called work thoughts kept creeping into my head like an unwanted dream. But this was not work for me anymore; it had turned into a passion or a hobby, or something else that did not carry the negative emotional baggage that most people assign to thoughts or activities they label as work . No, this was definitely not work. In fact, this is the basic idea of reconstructing a process-based organization: aiming at making people feel passionate about their work. But how many things actually extinguish that passion? Typically no one in the organization pinpoints the causes of deflated enthusiasm about work, and work lives continue their existence with indifference and resignation. Very little can be found about human feelings and emotions in organization charts and operating manuals. Management that relies on these tools considers issues about employee motivation, morale, and emotional well-being only superficially. And as a result, business suits move around office buildings and greasy overalls on shop floors page_71 Page 72 without a feeling of purpose in the 9-to-5 purgatory we call work . What really happens in people's minds? How many things block productive action? How many passions are being checked at the workplace door, like umbrellas waiting for their owners at the end of the day? And sometimes these passions are abandoned in the lost-and-never-found bin, never to be applied at work again. Going over experienceships in other change projects, I remembered witnessing bad relationships between bosses and workers and among co-workers: lack of self-esteem, overcompensating behaviors, no sense of belonging, unclear visions for the company in the future, undefined work and unclear goals, anxiety, destructive emotions, etc. We learn to cope and live with negativity through a defense mechanism that creates an antidote against all emotions, including passion for what we do. The only way to break these mental barriers is to invite a new spirit within the company, and create a climate where people are treated as such. To start with, and before we redesign any physical aspects of the factory (or any type of organization, for that matter), management must share enthusiasm for this new spirit, understand the emotional dynamics that govern behavior and actions in their groups, and channel positive emotions into collective acts that become the healthy neurons of the organization. Some leaders have the innate capability and use it; others have it, but it is in a dormant state; and still others need to learn it, and it can be learned . At that instant, my thoughts echoed back to other times and places where my mind had spoken these same words: at an informal chat during a management retreat, at an official meeting with a CEO, at a speech at my college campus: Leadership can be learned . A note of salvation and the promise of healing still rang strong in the emotions that were

coming back to me, connecting me with old emotions as if they belonged not to the past, but to a long unending now . Is it the past that repeats itself? Or is it a flowing present that never ends? Yes, leadership can be learned by looking at what the mirror shows us in the nowness of the present tense, and leaving out any regrets over the so-called past, and any anxieties over a so-called future. But the possibility of change in page_72 Page 73 oneself is available only to those who are willing to look in the mirror. That is the first step. Another fundamental issue in generating that passion is to make people feel useful, needed, appreciated, and proud in many ways. This feeling is nearly nonexistent for lathe operators who are always doing the same thing, or an office worker who mechanically enters clients' orders into a computer, every minute and every hour of every working day. This changes when a person becomes a member of a team or cell that works as a minifactory producing finished parts, or as a mini-company in which the team is responsible for a significant administrative-commercial process. Even when one member of the team or cell continues performing a basic function, the team atmosphere creates two distinct elements: First, that person will physically see the final result of the work, something that adds aggregate value. Second, that person will be working in a place where, with progressive training, he or she will acquire skills and knowledge from co-workers. The team that constitutes a cell also creates a natural psychological buffer that helps group members feel safe to ask questions, take risks, and make mistakes and correct them without reproaches or reprisals. The same teammates can offer each other emotional support in difficult times. That's why developmental relationships with other people are fundamental to good mental health. This also means defining with care within the work cell the appropriate role/position profiles—both physical and emotional—for the leader and for all the members of the team. World-Class Manufacturing The following Monday morning, after revising the ratios I had to send to the main office, I called Arthur. He didn't call back right away, so I called two more times: first at noon, and then early in the afternoon. In the end, the only answer I got from his secretary was that she had no idea about Arthur's whereabouts. I decided to go to the factory, which was not far from my office. It was mid-afternoon when I arrived. I went directly to Arthur's office to ask his secretary to announce me, but I soon page_73 Page 74 realized that he was there alone. I waited a few minutes before knocking on his door and entered his office slowly, but with determination. Arthur was a key player; I needed to win him over and make him my "co-conspirator" in running our first pilot for the Phoenix project. His face looked tired, and from the piles of papers and blueprints on his desk, I could sense his mental overload. I was feeling guilty and at the same time I felt compassion for the man. I pressed on with a smile. "We had a meeting today, remember?" I said. "Yes, and I am sorry. We are so busy nowadays that I have not found time to even go to the bathroom, and it's not even funny." "Okay, Arthur, I understand. But do you remember that we agreed to present the plan of changes for the factory at this week's directors' meeting?" "Yes, I remember that." Arthur stood up and faced me. "Do you know how many change projects and plans we have presented since I started working here? Hundreds!" he exclaimed. "I believe you, and I don't know what happened to those plans or why they did not materialize. There must not have been a deep conviction that those plans were the right way to go." "It was not that, John. I have the conviction that we have to make changes, and I have moved people in a different direction many times: But when we are halfway there, we either

lose steam and other priorities overcome us, or we don't have a budget to continue with the change project. People feel that they have made fruitless efforts. They are tired, I am tired, and we are all tired." His face looked more convincing with every word. "I feel this change effort is different. Martin is committed; otherwise, I would not be here now. The company as a whole recognizes the need to change in order to remain competitive, to retain market share, and in short, to stay in business. You need to do something before it is too late. You didn't have a consultant who had external resources to help you out. Of course you can't do it all, Arthur, but I can tell that you feel the need and the urgency. It was no mistake that Martin asked you to go first. Besides, your area has the biggest stake in this project and Martin knows that you understand the company—you are a key player, and you have the skills to do this. Just let me help you. In previous change page_74 Page 75 attempts, did you have a plan and a timeline with milestones that everyone agreed to? Was it clearly delineated what benefits were to be obtained and how? Did you decide on how to measure costs and benefits, and how soon you could start enjoying those benefits?" "Yes, that was a problem. We defined benefits, and at a certain point, the president of this company demanded to see them. No one defined and managed expectations. Even though I explained that there had been a budget restriction, there was a sense of failure around my management. That is why I want to be careful about what we prepare this time." "Don't worry, Arthur. We will," I replied. "Another thing I can't understand is why we have to start at the factory. It is always the same. People at the Administration and Commercial Departments never make any effort. Do you know how many people I let go in the past five years?" "How many?" I asked. "Thirty percent. I can show you some statistics. We are producing 20 percent more with 30 percent fewer people than five years ago," said Arthur. "Your management has been excellent," I encouraged, "within the limitations imposed by traditional productivity improvement initiatives, such as applying classical Industrial Engineering tools and conducting a Method and Times study or a critical operations study at the factory. In addition to this, if it makes you feel any better, until the late 1980s, most companies that based their productivity schemes on these types of quality improvement or reengineering projects generally ended up feeling discouraged. Great efforts were expended, for about a year or two, to increase earnings by just one or two percentage points. But the idea behind Phoenix is to implement an unconventional productivity program that looks for efficiency and operational speed across the entire enterprise." "That frustration also happened to us. What are the reasons for this?" "One reason for this is that western productivity schemes were based on Taylor's ideas about productivity, and later, on Manufacturing Resource Planning (MRP) systems as fundamental tools for increasing productivity. These schemes worked until page_75 Page 76 World War II, allowing countries such as the United States to obtain a competitive advantage with respect to Europe and Japan." "And then that changed, didn't it? By the middle 1980s, Japan massively exported products to the U.S. market, something that had never happened before," said Arthur. "That's right, Arthur. Their products were not only 30 percent lower in price, but were also of better quality. You can imagine the commercial impact this had." "And what happened? Because today, the United States has a very high level of industrial productivity." "At the beginning of the 1980s, the United States wanted to justify the productivity gap between American and Japanese products and costs in terms of robotics or superior idiosyncrasy of Japanese workers, loyalty, etc. At that moment, when American executives were wandering around Japanese factories, they found an unusual factory layout and distribution schemes with only moderate computer intervention. Factories were organized in

human work cells and teams." "Were these human teams built around their manufacturing processes?" asked Arthur. "Yes, you're exactly right. Building a factory on processes is something I compared to Newton's apple in terms of this century's productivity discoveries. Until then, a well-organized factory in the United States, such as a metallurgical plant, had a Lathes Department, a Drilling Department, a Presses Department, a Perforation Department, etc. The product moved along hundreds of meters, passing through many different departments that grouped similar machines." "That is exactly our case," commented Arthur. "From the point of view of individual productivity, a lathe operator was in theory efficient because he spent the whole day producing the same type of pieces. The western productivity philosophy is specialized, while the Japanese one is globalized. When you analyze western company results, the great individual efforts did not match the company's earnings, because you find factories with high levels of in-process stock, high levels of finished goods stock, long manufacturing lead times, and low levels in the product quality." page_76 Page 77 "I still don't understand what was wrong with the western way of production," added Arthur. "Let me give you a graphic example: Between any two workers, there was a pile of material, parts, etc. Imagine, Arthur, two workers: Worker A is manufacturing one thousand pieces on a lathe and them piling them. These pieces are being taken by worker B for drilling. Suppose you take a photo of both workers at that moment. Worker A has already manufactured five hundred high-quality pieces that are being taken by worker B to continue the production process. Imagine that worker A at that exact moment starts manufacturing low-quality pieces because he is not paying attention or because his tool has problems. If we take a photo of both workers at that moment, we will see that worker B is happily taking pieces from the pile of the first five hundred, and worker A continues manufacturing low-quality pieces without realizing it. Imagine if we take a photo some hours later when worker B has finished the first five hundred pieces and starts taking pieces from the second group. At that moment, he finds out that his co-worker has been manufacturing low-quality pieces and alerts him. After that, worker A starts correcting his mistake. What would happen if we took a photo at that moment? It would be like we were looking at an autopsy. There are five hundred low-quality pieces to be re-processed or scrapped. These five hundred pieces are our dead body ." "Yes, it is true," answered Arthur. "This happens to us when we have to produce subassemblies, and since we are not able to assemble them for differences in measurements, we sometimes find out there is a whole box of wrongly mechanized pieces that went out of the mechanized sector hours or days before. Man, what a waste!" "You are not alone, Arthur. This happens a lot, and not just in manufacturing," I replied. "It happens to people working in textiles when they dry a dyed cloth and find a knitting defect. And behind them is considerable stock with the same defect. This also happens to an electronics manufacturer when he wants to install a circuit into a plastic lid and cannot do it due to metal burrs and plastic injection problems, and there are boxes of plastic lids with the same problem sitting in the unfinished-goods page_77 Page 78 warehouse. This happens to a clothes manufacturer at the final stage of production when a sewing defect caused at previous stages is discovered and there are dozens of garments with the same defect." "I guess this should make me feel better," said Arthur. "And all this production loss caused by in-process stock is also happening here by the material piled between two machines at your factory," I replied. "In case there is a quality problem, the larger the amount of in-process stock, the bigger the dead body for the autopsy. It is a mathematical thing. In-process stock causes other problems: Think again

about the photo of the two workers. Imagine that one of them, for example worker A, is working excellently, thanks to an industrial engineering study that took several months. Apparently, this worker should be individually productive." "I think so," answered Arthur. "But since he is a human being, and not a machine, this excellent industrial engineering study becomes useless in case he decides to work more slowly or is tired. And in a way, inprocess stock becomes his hiding place." "What do you mean by hiding place ?" asked Arthur. "Metaphorically, I mean. Since there is a huge pile of in-process stock between himself and worker B, if he decides not to work normally, nobody will notice it at that moment because worker B will not be affected and will not complain, since he has sufficient material to keep him occupied. In addition, their boss cannot remember how high the pile was the last time he passed them. In that way, the worker regulates his own productivity." "Apart from financial problems related to working capital, does in-process stock cause any additional inconveniences?" asked Arthur. "Yes. Lead time is the main factor responsible for long-term productions. To understand this, you need to feel as if you were inside the box containing the one thousand pieces worker A is starting to process. You are piece number one thousand and you belong to a certain client. You will have to wait for your turn—that is, until worker A processes your nine hundred and page_78 Page 79 ninety-nine siblings. You are in line, waiting to be processed. When your turn comes, you are placed inside a box and have to wait until worker B processes your nine hundred and ninetynine siblings in front of you. You are in a queue again, and it will be like this in each operation within the factory." "Yes, in fact, you spend more time queuing than performing a useful operation," commented Arthur. "That is why the other day I told you that 90 percent of the total lead time is queuing and there is just 10 percent of productive time, when the product passes through the machine. This is a typical scenario in batch industries, and I have personally seen it. This relationship is common in metallurgical, textile, plastic, and electronics industries." "And when in-process stock reduces the queuing time, the time a product has to wait at each operation is also reduced, right?" "That's right, Arthur. As you can see, in-process stock is the immediate cause of three big problems at the factory: quality problems, hidden loss of productivity, and long manufacturing times. That is why production managers at some Japanese factories and an increasing number of western factories measure the in-process stock: It is the best indicator of factory efficiency." "I understand that," said Arthur. "But how is in-process stock reduced? I am thinking about our strategic vision of short series. I believe the situation will be even more complex." "It is not easy to reduce in-process stock, Arthur. In fact, it is an illness that can be treated with three different surgical operations that can be performed simultaneously: cellular technology, setup reduction, and Kanban-type storage systems. Let me explain…". I kept talking as I drew a big triangle on my yellow notepad. By that time, Arthur had pulled up a chair next to his and cleared a corner of his desk for me to draw pictures on my notepad. He was well into his "second wind" of the day. A full coffee stood guard on the credenza next to him, and his "lieutenants" were taking care of the smoldering fires that had burned brightly during the morning hours before I arrived. Arthur was now fully engaged! page_79 Page 80

Cellular Technology "The first operation," I continued, "has to do with factory redesign, by restructuring the work of the factory by processes. This method outlines a managerial concept known as cellular technology

for modular production . When a cell is formed and a lathe, a milling machine, and a perforator drill are placed together to produce a group of pieces or products, the end result is a mini-factory. Going to our previous example, let's suppose that in this mini-factory we have the same workers A and B we had before. After forming a cell, in the case of a metallurgical factory, you will not find more than one or two pieces between these workers. Suppose that worker A, for any reason, starts producing low-quality pieces. Worker B, who is in charge of the final machining of the finished part within the cell, has a statistical process control chart by which he systematically checks the characteristics of the parts being manufactured. This chart is used against the output of the cell to measure the pieces of a finished product. When worker B detects a quality problem, he immediately informs worker A so that corrective measures can be taken. Since the cell is small, there are no more than four or five defective pieces in the inprocess stock at any given time, not five hundred! Because workers pass each other the components piece by piece, there is little material or in-process stock within the cell when performing an autopsy." "Why is a statistical control chart used in the process? Why can't worker B control quality and quantity of the pieces he uses with a calibrated instrument or some other measuring device?" asked Arthur. "The gist of this issue is based exclusively on preventing a person from getting overly automated; routine work can do that to people. When a person is working with the same type of pieces all day long, sometimes he cannot see that the piece is defective because his brain is on automatic pilot. Then, using a process statistical control chart, which is predetermined, the worker controls a piece maybe every 10 minutes. This chart works as an alert that tells him, 'Now concentrate. You have to take a mental X-ray of the piece .' " page_80 Page 81 "I understand," said Arthur. "And what about other problems you see in western factories? How are they addressed?" "According to our cellular approach, it is reduced dramatically with regard to manufacturing lead time because there is less in-process stock between one machine and another (just one or two, and not one thousand pieces as before). In the case of a metallurgical company, the queuing time of a product, which is responsible for 90 percent of lead time, decreases significantly." "I understand this happening at a metallurgical company. But does the same thing happen in other types of industries?" "Yes, of course, Arthur. As long as you have in-process stock (or equivalent transactions), this happens. Lead times can be reduced through cell technology in clothes manufacturing; in the assembly lines of any product; at any sector of a textile company, such as spinning, knitting, or dry cleaning; at tanneries; and in similar industries. If, for example, you visit a textile dry cleaner, you will see one supporting easel, instead of four or five waiting between two machines." "Why do you have more productivity?" asked Arthur. "Think about our workers A and B. Say you take a photo of the cell. You will notice two things happening: One obeys the laws of physics and the other obeys cultural or social norms. If worker A for whatever reason cannot hand off pieces to worker B, the latter will stop working since he/she has no input. All this becomes somewhat obvious. In addition, don't forget that the change has to involve not only technical elements, but also human, social, and organizational ones as well, such as informal rules of the game." "I understand that," said Arthur. "According to your example, if we are playing a soccer game and you are on my team, I don't expect you to score a goal against us." Systems of Cellular Incentives "Exactly," I replied. "Another work team rule could be 'a fair day's pay for a fair day's work.'" page_81

Page 82 "I see, but who declares what is fair and what is not?" rebutted Arthur. The triumphant air in his voice said "I gotcha !" "This won't work unless we turn individual objectives into group objectives, such as 'to score a goal.' That is to say, people who share responsibility and accountability for the same objective have to be evaluated according to the end results of the cell—the actual output of the cell. Here is an example closer to home, Arthur: Suppose you and I share responsibility for the Phoenix pilot in your manufacturing area. To use an old cliché 'Your success is my success, and vice versa.'" For a second, Arthur fixed me frozen with a stare; he knew this wasn't just idle chat cutting into his valuable time. I meant business, and Arthur respected me for that. We both knew. The conversation moved on. "So John, tell me: When you talk about evaluation, do you mean to give them more money?" asked Arthur. "Not necessarily. Even when the results of the cell are measured in terms of production and quality, paying in terms of production and quality can only be a short-term remedy, but it is not a sustainable solution in the long run." "What do you mean?" asked Arthur. He was unaware of any other incentives available to employees, and was not used to looking at workers as real human beings with feelings and aspirations. I didn't blame him for that; it is easy to forget who we are when we enter "purgatory," and Arthur seemed like a caring and compassionate man. I knew even then that he was one of the directors that would look deep into his mirror. "You have to consider the work cell as a continuous quality control circle. People belonging to a work team, when adequately motivated, will be constantly thinking about how to improve quality and production, simplify designs to speed up manufacturing operations, implement better tools, solve problems with machines, etc.—in short, work smarter , not harder. In a permanent improvement cycle, if you are giving monetary incentives for production and quality, you have to adjust incentive scales continuously. If you used to pay 100 dollars for 100 pieces, thanks to technological improvements that cost you money, now you can't pay 130 dollars for 130 pieces completed in the same amount of time. That is, considering that the physical human effort to produce 100 pieces is page_82 Page 83 the same needed to produce 130 now, you lose the benefit gained from your investment in technological improvements, which again has a cost for you. Furthermore, if you consider this from another point of view, unless you pay 130 dollars, what incentive do people have to adopt any efficiency improvements? Otherwise, people prefer to stay at the same old production level. To them it's only fair. Or is it really?" "It is quite a complex thing, isn't it?" commented Arthur. "If you paid in terms of production and quality, would workers be responsible for the breakage of a machine or a shortage of raw material that prevents the cell from working and causes a decrease in production? That's unfair! Or is it really? If you don't attribute this to individual workers, then what is the best logical way to design incentives? With your current policies, determining incentive levels would be extremely complex, because you'd have to consider any pause in production and subtract that due to breakages or shortages for any reason. What do you do instead, award bonuses?" I wanted to see Arthur's reaction to this controversial last option: bonuses. He took the bait…. "Please, let's avoid talking about payment of bonuses," commented Arthur. "Sometimes I blame myself for giving a bonus to someone…not because of the bonus in itself, but because of how managers decide to give them out and what criteria they use. Do you know that sometimes a bonus is like a boomerang that comes back to hit you smack on the forehead? While you might be motivating one person, you cause the opposite effect in everyone else. And this is due to the difficulty in determining for whom and when a bonus is appropriate. Suddenly, somebody complains that a bonus has been wrongfully paid. If you don't give that person a satisfactory answer, his lack of motivation and resentment is even bigger than if

that person had not received a bonus at all." Arthur was now getting agitated, a residual emotion from a bad experience. I tried to deflect it. "And let's not forget union issues and disparate treatment, both of which are very valid, especially if the organizational culture is blind to discrimination, nepotism, or favoritism of any kind." There was a hint of indignation in my voice. I realized too late that this was a wrong move on my part. page_83 Page 84 Arthur stood up suddenly and went to the credenza to show me a pile of grievances higher than his coffee mug. "This is just this year's alone!" He was getting upset. I stopped him before any more hidden skeletons came out of his credenza, which I wasn't prepared to deal with right there and then. I made a couple of mental notes for later reference: 1. Get a couple of union stewards involved with Phoenix, and FAST . 2. Stop by the Machinists Union and give Mr. Antonio a courtesy call . The last thing I wanted to do was surprise Mr. Antonio with this. He's the head of the Local Lodge, a respected member of the community, and a fair man. I'll run it by Martin first, in case he'd like to join me. I needed to comment on the grievances without him getting any more agitated. "Yes, yes, yes, I have been through all of this, Arthur. I've seen it all. But there is hope, and I can help you there, too. That is why one of the basic conditions of any incentive policy is that everything has to be simple and clear. And, if possible, all the workers need to know at all times who gets the incentives, how much they're getting, and why. You cannot afford to leave fairness open to interpretation." "But, then, how should we reward high performers? I mean, how can someone get more money, be motivated, and get into this cycle of continuous improvement?" asked Arthur. "Look, Arthur. There is no pat answer. This has to be analyzed for each particular company, because it depends on the company's culture and many other mediating factors, such as how incentives were paid before, what you want to reward, and what constitutes performance. But to respond to your question in very general terms, a possible approach could be designing an incentive program based on the degree of cross-functional competencies demonstrated…that is, on people's ability to operate more machines within the cell, or their observable attitude and results toward innovation and quality improvements, or on level of analysis of quality and production page_84 Page 85 made at quality meetings held by the team in a work cell. Incentives can also include rewarding behaviors such as generosity, collegiality, and team spirit. Reward actions and behaviors that help prevent productivity loss in the first place: joint problem solving, negotiating with other teams on deadlines or shift sharing, and cooperative dispute resolutions. Rather than measure raw output and neglect the barriers to productivity, speed, and efficiency, help people dissolve the roadblocks and repair broken-down bridges. Productivity will take care of itself if you give people the tools to see where the barriers lie and allow them to remove them on their own. I have seen companies where the human aspects of performance improvement represented 60 percent of the bonus and the other 40 percent was determined based on quantity and quality obtained at the work cell level." "What you're saying then, John, is that a happy employee is a productive employee," said Arthur, summing it up in simple but concise terms. "Yes, something like that…. But also keep in mind the three technical aspects of factory productivity. Remember the triangle I drew earlier, Arthur: cellular technology, setup time reduction and flexibility, and Kanban."

Flexibility and Setup "When you talk about setup, you refer to the time it takes a worker to change a machine to work on a different part, right?" commented Arthur. "Exactly. It refers to the time it takes to change the mold or a die in a press, a roll of cloth in a dyeing pan, a chain in a loom, or a thread in a sewing machine at a textile company, or to change adjustments in a serigraphy machine or a mold in an injector, or to open the valve of a silo in order to change a type of flour at a food producer, or to change a label at a packing machine." "But what influence does this change have on the factory's productivity?" asked Arthur. "I think you are again looking at the new concepts from the western point of view: at a granular level. To understand this, you page_85 Page 86 need to see it from the Japanese point of view: globally. Let me tell you a bit of history. After World War II, when Toyota managers analyzed their commercial outlook, they understood that the industry leaders, at that time the American companies, seemed unbeatable: Hundreds of thousands of cars were being produced a year at tremendous economies of scale. Toyota's export perspectives were not very encouraging. Nevertheless, with its eastern philosophies applied to business, Toyota transformed what western managers would have considered a crisis into an opportunity. Toyota's commercial opportunity was to do what the U.S. automotive companies were not doing at that moment—that is, produce a greater variety of car models with a variety of optional features and colors, giving a much more customized response to market demand." "But wasn't productivity affected by introducing more variety? That was the reason why the United States was benefiting from economy of scale," commented Arthur. "Exactly. But that was the genius of the Japanese strategy: There was an opportunity to enter a market with more personalized products, but as far as they knew this meant being less productive. This would involve higher costs and would affect prices. It would mean ending up at the same place, not being cost-competitive. But they applied common sense: If there was a genuine need in the market, they had to satisfy it as efficiently as possible, and one of the keys of efficiency was the reduction of setups. When producing a large variety of products, there would be more changes, and if these changes took the same time as before, the company would inevitably decrease in productivity." Arthur interjected, "I remember in college we studied the optimal lot formula. Do you remember? The optimal lot formula is a square root of the financial cost needed to produce that lot, and the time it takes to change the machine. This formula gives you the quantity of pieces to be produced, or the optimal lot, for every machine setup change. For example, according to the optimal lot formula, if it takes an hour to change the machine, I will not be producing ten, but rather five hundred pieces at the minimum, which is quite sensible." "You are right, Arthur. But that formula assumes certain preconceptions, such as that the time of setup is fixed—that it is a page_86 Page 87 constant. And this is exactly what Toyota disputed. They asked themselves: Is it always fixed? And through tests done by experimental learning groups, they started reducing setup times for the most critical operations in their factory. Do you know how long it took here, at the beginning of the 1980s, to change a heavy mold in a press that produced fenders?" "How long?" asked Arthur. "Between four and six hours. In Japan it took ten minutes. I'll ask you something else: Suppose you are a Formula One racer, and you have to change your wheels. You go to the pit, and when you stop your car, the mechanic in charge of this work goes into the garage, gets a wrench, comes back, and then changes the wheel." "That is ridiculous," commented Arthur. "Nevertheless, this is what we do at the factory when we change setup. The worker says: 'Who has my wrench?' or 'Which is the next product?' or 'This mold needs sharpening,' or 'I

don't have enough raw materials to produce the next part.' Meanwhile, precious minutes are wasted in tasks that can be easily avoided, or planned for ahead of time." "But I think that in some cases, to reduce setups of some critical machines, I need to make big technical changes that are expensive. For example, to facilitate the adjustment of molds, I'd need to use hydraulic clamps, instead of a few nuts and screws," Arthur replied with confidence. "Look, Arthur. According to my experience, it is possible to reduce up to 50 percent of setups by improving the management or introducing low-cost technological improvements," I countered. But Arthur pressed on. "When you say 'improving the management,' you refer to what a team of mechanics does at the pit in a car race. They work synchronically and are a wellcoordinated team, having all the necessary tools at their immediate disposal." "That's right. Important reductions in setups can be obtained only by optimizing the change process. I'll tell you even more: Studies have shown that by relying only on organizational culture to transmit the importance and urgency of setups to workers alone reduces setup time by at least 10 percent." page_87 Page 88 "That's very possible," commented Arthur. "At some factories, setups are considered break time or specialist's time, since there is usually just one person, the 'surgeon,' who knows how to change the machine or how to set up a new production series." "That's true, Arthur. In fact, industrial engineers like you and me are always being asked to apply traditional Time and Motion studies to the machine operation during production, but not during setups, strictly following a myopic Taylorian tendency to break things apart and measure the smallest possible level of analysis." "I imagine that once setup management has improved, the best effort curve cannot be lineal," Arthur added. "Instead, each time you manage to achieve an incremental improvement in setup time, you need to make a greater investment in machine maintenance or upgrades." "That is right," I replied. "But following an austerity principle, we must make an initial effort to apply all our common sense to improve production: control press clamps, preheat mold injectors, maintain uniformity of mold heights, etc., and then when you reach that economic limit, consider new capital investments." "Okay, but who designs these common-sense improvements to the machine itself?" asked Arthur, apparently confident that his knowledge of the manufacturing world was far superior to mine. Consulting is a tricky business and one can't know it all; I could sense he was testing my knowledge of his business, and it was in the interest of mutual trust and credibility that I continued to withstand the drilling. "From what I have seen done at other successful companies, the close involvement of the worker in charge of the machine is essential," I commented. "Maintenance and Engineering people also take part, but worker involvement is basic, because different objectives are achieved. First, the person who knows all the details of the required change takes part. Second, the workers are encouraged from the beginning to make intellectual contributions. From this comes a sense that the new work method is part of the workers' own creation, and not an imposition by management." "Okay, I get that," replied Arthur. "Another question: When you mentioned there is a strict relationship between, for example, a cell and a setup, what were you referring to?" page_88 Page 89 "It would not make sense to have a cell where raw material flows very quickly and has little in-process stock, but has one or two machines within the cell with long setups. This would force the cell to slow down, despite its high speed at manufacturing the parts, and would have to be limited to only certain products," I responded. Arthur kept pressing me further. "Is this related to the factory's flexibility? I understand that when we reduce setups, we should also have proportionately less in-process stock. Is that

right?" "That's quite right, Arthur. In fact, you reduce both the levels of in-process stock and the stock of finished goods. For example, imagine the production plan of a factory that produces five products: A, B, C, D, and E. In a conventional production plan, it produces product A on Monday, then changes the mold from A to B. On Tuesday, it produces product B and then changes the mold from B to C. On Wednesday, it produces product C, and so on. From a commercial point of view, this factory is producing great lots, because each setup takes about two hours per day, and from the traditional production management point of view, the only reasonable thing to do is to produce a great lot each day to justify the time wasted in setup. This great lot, for example of product A, then follows successive production stages in the factory. But what does this imply?" "In-process stock between machines, obviously," replied Arthur. "That is right: a big elephant moving along the factory. Like all elephants, it has two characteristics: voluminous (in-process stock) and slow (long manufacturing lead times). But apart from this, in the case of a factory that produces some of its products against stock, as could be the case with a spare parts manufacturer, this production method entails an increase in stock of finished goods. It is not good to allow a production technique to drive business decisions; having too many finished goods in stock is perhaps just as bad as not having enough." How to Reduce Stocks of Finished Goods "Then how do you manage this relationship with the new production technique?" asked Arthur. page_89 Page 90 "Imagine that while you are producing product A on Monday, a client places an order for product E. You will surely want to offer a good service, and therefore, you need to have stock of product E, at least a stock of finished goods equivalent to the big in-process lot of product E. With successive orders on Monday, Wednesday, Thursday, and Friday, you are delivering stock of product E, and when Friday comes, you produce and replace the whole lot of product E." "I get that, John. Let's suppose we reduce setup," retorted Arthur. "Yes, imagine, for example, that great progress has been made, and setup has been reduced from 120 minutes to 24 minutes—cutting the time by 80 percent. In that case, we can produce all products—A, B, C, D, and E—on Monday, with a lot five times smaller than before, making five 24-minute changes a day. What you will see at the factory instead of elephants will be mice. If you took a picture of the factory at some point, instead of an elephant behind each machine (huge in-process stock), you will see lots of different mice (little in-process stock)."

Figure 7.Set-up Reduction: Efficiency and Lead Time "I like mice," said Arthur. "They are much faster than elephants." "Exactly. Factory lead times are much shorter. I remember the case of a factory that produced electrical engines some years ago. page_90 Page 91 An electrical engine, which was their best-selling product, was produced against stock. They also produced short series of other engines on demand. The best-selling engine was produced only once a month. One of the main assembly operations among the 50 the engine required was to stamp metal 'stator-rotor' sheets. This operation was made at a press with progressive molds that increased in weight up to 1500 kilos. Set-up time was two hours. This set-up time was the only criteria the production manager in charge of the production plan was forced to consider, and resulted in the scheduling of a once-a-month production run for this engine, in one big lot. The result of this was a considerably large amount of in-process engine parts stock and an overstock of this engine at their finished goods warehouse that exceeded its monthly sales. Working on press setups, the company made the following improvements: guide bars were designed to place the mold on the table faster, adjustment nuts and screws were replaced, a rollers table was set in place to move the mold easily toward the press table, quick adjustments were made to hook the stator-rotor sheets, and team activities were synchronized. By doing this, the set-up time was reduced by two and a half hours at the initial stage. One of the main consequences of this reduction, even before factory cells were formed, was that their best-selling engine could be produced once a week, instead of once a month. In-process stock of this engine was reduced by one-fourth, and the stock of finished goods was also reduced since the engine was produced more frequently." "That is clear," commented Arthur. "And how does the third part of this triangle, the programming system, work in the new scheme?" Push and Pull "You see, Arthur, with respect to a production programming system that is consistent with cellular technology and set-up reduction, there can be different options, depending on the factory. When choosing the best option, one has to keep in mind that the production programming system should be part of a harmonious page_91 Page 92

whole that satisfies in the most efficient way the processes, the organization, and its culture and systems." "I heard you saying that Kanban is an option." "Yes, it is an option. We can talk about it if you are interested." "Yes, please continue," replied Arthur." "Kanban bases its philosophy on the concepts of item replenishment in supermarket shelves and aisles. Imagine needing to go to the supermarket—why would you go to a supermarket and not to a small shop?" "Basically, because I can find what I need, all in one place," replied Arthur. "That's right. Theoretically, at a supermarket, you look for things and find 100 percent of them. This does not happen at a small shop. But in addition to this, if you observe how supermarkets restock items in shelves—let's say where the sugar is—you will notice that when there are nine or ten bags left, an employee comes with a trolley full of 5-pound bags and replenishes the stock."

Figure 8.Push vs. Pull Model "This sounds quite ordinary," commented Arthur. "In fact, it is, but it becomes quite extraordinary when we compare it with the planning systems in our western factories." "What do you mean?" asked Arthur, looking interested. page_92 Page 93 "I mean that in most Western factories, we do exactly the opposite with our programming systems. The main difference, in philosophical terms, is that at a conventional factory we push parts. According to the Kanban concept, it's a pull, and the one who pulls is the client. Clients are the ones who have a concrete demand for products that they pull from the shelves. And when the shelves are empty, which is as visible and evident as an empty supermarket aisle, the 'pull' goes to the warehouse. In short, Arthur, this is what we call pull , and Kanban means exactly that: applying the supermarket aisle and shelfrestocking concept to the factory. Can you imagine the supermarket clerk coming out regularly with a trolley full of bags of sugar and pushing to overstock the packs, regardless of whether or not the shelves are full?" "No, I've never seen this happen," said Arthur. "That would be a wasted effort." "Nevertheless, this is what we do at our factories. This is called push . We 'push in'

process parts to the next sector without knowing whether it can absorb the quantity of products. When you analyze a Western conventional factory, it is normally pushing the material from one sector to another, and it can happen with elephants and mice if one is not careful. Factory workers and supervisors concentrate on producing as much as possible—that's what we pay them to do. They do this without thinking, getting rid of partsin-process like passing a hot potato or getting a monkey off their backs, by sending them to the next sector." "But producing as much as possible is the right thing to do, isn't it?" asked Arthur. "It is, theoretically, from an individual point of view, or from the point of view of a supervisor in charge of complying with certain production and efficiency quotas. But this makes no sense when looked at from the global point of view: the finished product, the total process, the whole factory. A product being manufactured goes through different sectors of the factory. If one sector produces more than another, what is the sense of this? What we get at the end of the production line will be limited by the sector with lower capacity; the 'weakest link in the chain.' We must look at the entire production system from a global point of view." page_93 Page 94

A New Production Synchrony "Okay, I understand the concept, in theory," replied Arthur. "But then, what do you want me to do with the sector that is overproducing? Stop the machines so that everyone else can catch up?" "Yes, exactly, because when this sector overproduces, it is using raw materials, and when there is a shortage of these materials, the sector will order more from the warehouse, and the warehouse from the supplier. All this extra work is done just to have the products stopped in the middle of the factory." "I understand that," commented Arthur. "But if I turn off the machine that is overproducing, what should I do with the people? Aren't I losing productivity?" "That is why I told you that the concepts of cell and Kanban are connected," I replied. "At your new process-based factory, you will not have a machine feeding another with high piles of in-process stock between one machine and another. You will have cells with fewer inprocess pieces between machines. Let's suppose a cell has three machines involved in a process. Two are quick and take 30 seconds to machine each piece. The other is slow and takes about a minute to complete each piece. At a conventional factory, the area supervisor would ask two workers to each work at a half-minute machine, and once production is done there, he would ask one of the workers to continue the process at the one-minute machine and would give another task to the other worker. At the cell level, things work quite differently: Using the same example, imagine that a worker is in charge of both half-minute machines and the other worker is in charge of the one-minute machine. If you equate the cell with a black box, what you will see is that the first worker works at the first machine, then this machine stops for half a minute. Then he works on the second machine, which then stops for half a minute, and the piece continues to roll toward the second worker, who continually works on his one-minute machine, performing the third operation. Arthur, what do you think is the output of this cell?" "Well, considering we are simplifying the process because we are not taking into account transfer times between the two page_94 Page 95 workers, the output is one piece per minute, or 60 in an hour," responded Arthur. "you're exactly right. And this is a great improvement from conventional production: We obtained one finished piece per minute. And if we apply statistical process control at the cell's output level and we detect a mistake, it will involve a minimal quantity." "According to this new concept, it looks as if it does not matter whether the machine is stopped or not. What really matters is whether people stop or whether material accumulates." "Right again. The objective is to speed up the process with minimal floating stock and to take

advantage of people's potential, both physical and intellectual, so that the team in the work cell enters a cycle of continued improvement and innovation of their own processes. In addition, the physical proximity of the operators to each other, as a team and between machines within the cell, enables a higher level of productivity that was difficult, if not impossible, to achieve in the past." "What exactly do you mean?" asked Arthur. Criteria for Incorporating Technology in the Cell "Imagine the case of a mechanized process, like machining an engine part within a cell. It starts with turning at a semi-automatic lathe and then goes on to a semi-automatic drill. The semi-automatic lathe takes 80 seconds (60 seconds for manual loading and downloading and 20 seconds for the automatic turning). In addition to this, the drilling operation takes 60 seconds (30 seconds for the operation itself, and 30 seconds for loading and downloading). Before organizing into work cells, the supervisor in a conventional factory normally assigned one worker to the drilling operation. This person was busy only 30 seconds out of every minute while loading and downloading pieces to be worked on. The supervisor saw this as something normal. What could the drill operator really do in the other 30 seconds? Through the drill passed pieces of various parts, but there were no predetermined routes. Sometimes the worker was asked to pre-cut wires of a certain length, but generally page_95 Page 96 he or she spent 30 seconds staring at the machine. Even though he could have overlapped this work with another task, the next machine was five meters away, and he would have lost 30 seconds regardless, just walking back and forth. Nevertheless, Arthur, my point is that this situation looks quite normal according to our Western manufacturing experience. Imagine that this happened to all workers within the factory. What is their real level of productivity then?" "According to what you said, it is only 50 percent, because everybody is doing nothing productive half of the time." "Exactly. But in the cell, due to the physical proximity of the machines and the fact that there are predetermined routes (that is, there are specific machines assigned to specific processes that determine the routing sequence), the situation changes. In the turning and drilling example I was using earlier, once a cell is formed, the continuous improvement starts. For example, in the case of drilling, we can consider the possibility of reducing the 30 seconds of loading and downloading to 10. 'To do what?' you may ask. To use the 20 seconds necessary for the semi-automatic drill loading and downloading, which now takes only 20 seconds, so that one worker can be in charge of two machines. These are challenges that should be taken up by Engineering and Maintenance, where normally, simple commonsense solutions yield in expected benefits: Operators and workers responsible for machine operations should always be involved since they know their equipment. This is the criteria for investment within a cell. Before replacing old equipment with faster machines, look at where small changes in current automation and low capital investment can produce important increases in overall productivity." "But wouldn't it be the same if we used one of the new numeric-controlled lathes to combine the operation, instead of a driller and a turner?" asked Arthur. "Technically, yes. But you must consider from a global, factory-wide perspective, the costbenefit relation: with a smaller investment, and through smaller devices, you have simple machines involved in a process, which are sequentially and productively processing several operations of a piece, just as a numeric-controlled lathe would do. With a sophisticated numeric-controlled lathe, you page_96 Page 97 reduce manipulations between machines within the cell, and this should be considered in the

equation. In fact, from an economic point of view, there are no standard recipes or magic formulas. In previous projects, we started forming cells with simple machines, and some operations within the cell were automated by the same factory engineers with the same objective: to gain productivity. But when the volume of pieces going through the cell increases due to increased demand and a larger capital investment in new technology is justified, you may still find a cell consisting of four or five simple machines and the new numeric-controlled lathe in the middle. But believe me, this is different from Western criteria for investment, according to which an expensive high-technology machine is inserted within a structurally inefficient sector. This happens, for instance, when we buy a numericcontrolled lathe or any high-technology machine that is to be introduced within an inefficient chain or process (a process with huge intermediate stock, long lead times, and quality autopsies that demand rework). All we obtain from the machine's quick operation is lost from there on. It would be as if we bought a sports car to get to places faster, then traveled along a highway for a few minutes, hit a traffic jam, and were forced to complete our trip on back roads through small towns with lots of traffic lights and extremely low speed limits. We would be wasting our car's potential. Things would be different if we drove along an open highway all the way." "That is clear," commented Arthur. "But just one other question: How do you get a person within the work cell to become involved in the new approach if he or she feels that jobs will go away?" "Nobody will help you if jobs are in danger of going away. That's obvious, Arthur. That is why it is so important that this change becomes in everyone's mind not a reduction in personnel, but an organizational and human resource development effort. It needs to be a company-wide change project in which growth not only guarantees more value to shareholders, but also guarantees the retention of the company's principal resource: its human and intellectual capital." "I am beginning to understand that," replied Arthur, "but we will need a lot of communication, coaching, and reeducation page_97 Page 98 of our employees, something that was not needed before in the old way when workers were considered an extension of the machine. Seems like the new organization approach based on processes turns the tables around by putting people first. Is that it, John?" "Yes, reeducation is a key word, and it starts from the top and then moves down. In the old ways that you just described, you could get by with supervisors and managers running the plant populated with machines and their operators. In the new way, you need leaders at all levels to deal with people first, then processes, and then machines; that's what I mean by intellectual and human capital being first, then equipment. By putting emphasis on what has the greatest pay-back in productivity, you don't cut jobs, you create new ones." "John, I understood the relationship between the work cell and Kanban—that is, overproduction does not mean inactive people, but actually more finished goods. But I have another question: Is what we are talking about here applicable to all companies and other industries?" Earlier Arthur asked why the other areas of the company such as Administration and Sales had not been involved in previous change management projects, and now with this project, Manufacturing was the first sector to implement change. It was as if he were saying, "Everyone always picks on anufacturing." Virtual Cells "Yes, process-based organization concepts and tools are applicable to all companies, in the sense that they are global tools. But each company is unique in terms of organizational culture and how they select their business strategy. Even in two competing companies that manufacture the exact same product, these concepts would be applied differently, due to the fact that their operation is different: different people, different processes, and different technology," I replied. "Also, these new global concepts can be extended beyond manufacturing to service-type companies, or to service areas within a manufacturing company. Look, for instance, at what we page_98

Page 99 are proposing to do in our own Phoenix project: After we do the pilot in your area, we'll move into Administration, Marketing, Sales, back offices, etc. Don't worry Arthur. Phoenix will reach everyone in the company." Arthur once again raised his eyes to fix me with the same stare he had used before. He knew that I had sensed his concern, and I knew that he wasn't as worried as he was before this conversation. Not that I could read minds, but after years of consulting, one learns to pick up the signs of shared feelings, emotional contagion, and emotional synchrony. Arthur and I were getting to that point. The Phoenix pilot was already underway, and Arthur sensed that. I knew then that Martin had made the right choice in making him the point person on our change project. "You know, John," continued Arthur, "I still can't figure out how cells can be formed in factories where relocating machines is extremely difficult. For example, at textile companies, continuous spinning machines are long and heavy, and they need to be well-balanced to be moved." "We think of these kinds of machines as monuments. I usually suggest that my clients design the work cell around the monument and not move the monument." "Nevertheless, there must be companies where it is practically impossible to relocate machines. What happens in such cases?" "Then virtual cells can be created: Machines stay in the same place, but a team of workers is organized around a process. The team interaction still happens with clear rules and measurements in place. And overproduction of in-process parts between machines is avoided and lead times decrease." "I get that," said Arthur, "but returning to Kanban: Does it replace manufacturing resources planning (MRP)?" Arthur paused to think for a second, now really getting down to the tactical level. "I know it's getting late, John, but remember that we agreed to present the plan of changes for the factory to Martin and the management team at this week's directors' meeting." "Thanks for reminding me. What we are talking about here is very important for you to consider, and you will need to know all this for this week's presentation, so let's continue." page_99 Page 100

Kanban and MRP "Arthur, Kanban does not replace MRP, because two different things cannot replace each other—you need both. As you know, in general terms, an MRP system works independent from any commercial strategy, although it always follows the same logic. This logic of an MRP system implies having production plans derived from forecasting sales through estimated demand, and then subtracting the stocks of finished goods. The resulting number is what we need to produce, according to MRP logic. Then these finished goods are divided into their components. From this supply of components, you subtract current stocks to obtain the quantity of components we need to produce. We know which process is required for each piece—that is, which machine each piece will go through. Then, when all components of the production plan are analyzed in this way, you obtain a certain amount of orders of components for each machine. This is the plan sent to the factory. And, as we said before, the shop-floor supervisor decides what the best sequence to process the orders is." "Right," said Arthur. "As we saw the other day, the MRP does not synchronize production. For example, we wouldn't use the MRP to connect two sub-assemblies that form a group, each coming from a different area, to arrive at the same time for their final assembly." "That is right. Technically, the Kanban system does what the Shop Floor Control module of the MRP cannot do: the synchronization of production sequences." "But the MRP," insisted Arthur, "is an excellent tool for generating a production plan. Once sales estimates are determined, it generates net needs. It is also excellent for the control of production later on, in order to meet standards and phase shifts." I jumped in. "In fact, when it comes to production control, don't forget that the factory will be composed of work cells, so instead of having 300 machines, you will have 30 cells, which simplifies production enormously." "You know, John, that we are migrating to a much more sophisticated MRP system (MRP II).

What do you recommend?" asked Arthur. "Yes. We talked about that with Martin. I'd recommend that you wait for a few months. You wouldn't want to buy a sophisticated and page_100 Page 101 expensive MRP system only to use it at 50 percent capacity, would you? With the redesign of the factory based on the concept of processes and the new factory programming vision, you can more than double the productive use of the MRP. My recommendation is to build a solid foundation first with people and processes, then move into new ." technology "Okay, that sounds reasonable. What are Kanban's practical effects?" asked Arthur. Kanban: A Supermarket "Look at Kanban as a true supermarket aisle with many shelves, where all manufacturing sectors can take any needed part to continue production uninterrupted. The advantage is that in Kanban, restocking is done automatically: a client-cell goes to the Kanban and takes an item (raw material, part, or sub-assembly) from it, and when that shelf gets below a certain level, it sends a signal so that the supplier-cell (which was previously the warehouse) replenishes the shelf with more items," I explained. "But do all possible items used and produced appear in the Kanban?" asked Arthur. "Well, yes, all those parts you decide you need to have handy are. It doesn't make sense to have other unnecessary parts in the Kanban," I replied. "And that is a key point of consideration. Parts that are used frequently would typically be included in the Kanban. However, special pieces produced on demand would not be included." "I understand that," said Arthur. "I am imagining a Kanban for those standard product items we use frequently. That way, when we need to assemble a specific group for one of our lathes, assembly-cells would be able to pick up related sub-assemblies from the Kanban, synchronically and in the right quantities. But what happens to special pieces, the ones that are not in the Kanban?" "One solution is to control them through the MRP," I replied. "In this way, when the special piece arrives at the Kanban, it is joined to its standard siblings to form the final group assembly. And there are other alternatives," I replied. page_101 Page 102 "You know, John, I am thinking that even if we just consider the standard pieces we have in production, with such variety of pieces, we should have large quantities of in-process stock only in the Kanban storage," noted Arthur. Kanban and Setup: A Close Relationship "It is possible. Nowadays, you have a warehouse of pieces produced in terms of their assembly. With an MRP, you analyze your warehouse stock, and in case you need to produce more of a certain piece, the system issues an automatic order of production. This will never happen at Kanban. You will always have stock of those pieces you predetermined in the Kanban with 100 percent service and without shortages. In addition to this, I know you have had problems with MRP, basically in the loading of data of in-process stock. Since data was incorrect, you did some reprogramming based on what the system told you"for example, that you had in stock a certain piece, when in fact you didn't. This would have never happened with Kanban, because the system is visual; there is a place for each piece and the replacing level is perfectly indicated. Nevertheless, a company with lower intrinsic flexibility"a company that produces only large lots (and this has happened)"also loads large lots in their Kanban, and the result is variety in great quantities in Kanban storage. This can lead, paradoxically, to having more stock in Kanban storage than in the previous case." "But that's not acceptable, if what we want to reduce is the in-process stock," commented

Arthur. "Of course not," I replied. "Kanban storage always has to have less stock than was carried before, and it should also guarantee an instantaneous response to any order from a clientcell. To make Kanban storage carry lower volume, we need to have reduced setups at the supplier-cells that feed the Kanban." "Do you mean that you have to reduce set-up times at critical machines within the suppliercells prior to introducing Kanban?" asked Arthur. page_102 Page 103 "Exactly," I replied. "In this way, the cell can produce small quantities, and provide the Kanban part when it orders them. Then, if we take a snap-shot of the Kanban, what we will see is that all pieces are there, but in lower quantities, which is more than enough for offering a 100 percent service to the client-cell. That's because what matters is available variety and replenishing speed, not quantity." "So this means, in a certain way, that a company that has not done its homework to reduce setups can have an over-dimensioned Kanban." "That is absolutely correct, Arthur. But there are two additional factors other than setups that help you have a Kanban of limited volume. First, the Kanban has a cell supplying it that has a lead time much smaller to the ones in a conventional group of machines with huge stocks among them. This means quick replenishing times for the Kanban, and as a consequence of this, levels of stock are lower in the Kanban storage than in a conventional warehouse. Second, as a virtual system, replenishing time and communication to the client-cell is instantaneous. There is no need to go through a computer system or an interpretation so that overhead times are shorter. This also makes stocks much lower than what is needed in a conventional warehouse." "Here at our factory, we have parts that are produced in a specialized way," said Arthur. "They are not stored in the Kanban, so how can we control them?" "These parts can be controlled with the MRP, but you can also apply the global principles of cell organization we talked about," I said. "Can you give an example?" asked Arthur. "Yes. For example, we can form a cell for those special parts. This will give you speed. But you can also work on machine setups to have the possibility of producing short production series in an efficient way," I replied. "Changing the subject, John, last year we read a lot about the Bottleneck Management technique and about finite scheduling information systems. What is your opinion about them?" commented Arthur. page_103 Page 104

Kanban and Bottleneck Management "Bottleneck Management works on bottlenecks that occur in production systems. It is based on the principle that factory output is dependent on system bottlenecks, which is true by the way; the bottlenecks regulate the entire production process. In addition to this, due to the fact that an hour wasted in a bottleneck is an hour wasted by the entire system, it suggests the incorporation of buffers or in-process stocks before bottlenecks to avoid delays. For example, when a machine breaks in a previous process, this impacts the bottleneck by producing shortages in stock." "I think it is quite logical," commented Arthur. "We applied some of these principles here, but I must admit that in our case, it caused more complexity due to the great variety of processes we have, where bottlenecks change as a function of the selected process." "I will comment on two things that might interest you. The first is that Kanban has intrinsically similar principles to Bottleneck Management because it makes production advance at the same speed as the bottlenecks, avoiding overproduction and accumulation of in-process stock." "How is this done?" asked Arthur with increased interest.

"Well, it is thanks to the Kanban philosophy. Suppose that a client-cell is taking material from the Kanban storage. When a critical level of a certain part is reached, then a replenishment signal is sent to the supplier-cell—there is a pull by the client-cell. The suppliercell is not pushing the material or accumulating an overstock, but rather sending material to the next sector in the quantity and at the time needed. In addition to this, imagine that there is a bottleneck at the supplier-cell, which is regulating the suppliercell output with respect to the client-cell reposition. Following this reasoning, the supplier-cell can also take pieces to continue production from a Kanban storage, which is being provided by its corresponding supplier-cell. This new supplier-cell can also have bottlenecks that affect its output. In this way, considering all Kanban storages and cells in the system, we will see that the global production process will always be producing at the system page_104 Page 105 bottleneck's speed." I paused briefly before Arthur pushed the conversation forward. "And what's your other comment?" "It has to do with a more philosophical issue that in practice produces quite different results. All these concepts we are talking about: Kanban, cells, setup reduction, etc., produce efficiency at the base of the factory. Important structural changes take place, and the manufacturing methods change according to a very different philosophy, where the key word is flexibility . To achieve flexibility, we need to make a significant change effort that goes beyond how we run the factory. We have to work on organizational culture, on people's skills and competencies, on processes, and on machines. And what we get from it is an intrinsically more-productive factory, because we are taking into account all our functional components and all our resources to make them work synergistically: people, processes, and technology. In the end, we are providing to our most valuable resource (our people) a chance to develop themselves and improve their process and their work life within their work cell. They have the opportunity to run their mini-factory." Bottleneck Management: An Aspirin for the Comatose "Do you mean that Bottleneck Management is a poor remedy for increasing productivity in the factory?" asked Arthur again. "Look, Arthur, Bottleneck Management has its applications. For example, I am thinking it can be applied to managing that group of parts that are not included in the Kanban. But in general, I would say that thinking of Bottleneck Management as the only solution for increasing productivity at the factory level is analogous to giving an aspirin to a seriously ill person who expects a cure. The aspirin works on symptoms; it relieves a high temperature, but it does not address the true causes of the illness." "But even though it does not cure the causes of low productivity, it has been proven that its application reduces stocks, and as a page_105 Page 106 consequence of this, reduces lead times and delivery times," commented Arthur. "Of course, you can create this effect by making the factory work at the bottleneck speed. But you can get a much more conclusive result when you reduce stocks (and simultaneously increase productivity), working with low in-process stock. And when you physically work on machine setups to produce smaller lots, it again reduces stocks and lead times," I commented. "Isn't it possible to apply Bottleneck Management for production programming, combined with the use of cells and a reduction of setups?" asked Arthur. "You see, Arthur, if you already formed cells in a factory, applying Bottleneck Management techniques would be much easier. Because it's not the same thing to identify bottlenecks and program the production based on those bottlenecks in a factory with 500 machines as it is to do it in a factory with 50. But if you introduce cells, the 500-machine factory becomes a 50machine factory. The cell is a

production machine in itself , and this enormously simplifies the application of Bottleneck Management techniques. However, Kanban's advantage over Bottleneck Management is having the factory programming done by the workers themselves, based on the pull strategy. Factory workers pull from different cells by visually detecting critical points for replenishment. This decentralized production programming simultaneously increases worker involvement and satisfaction and makes better use of their time. And what is really important is that we enter into a permanent improvement cycle by continually reducing set-up times and the size of Kanban lots." "Nevertheless, as you mentioned, there are situations in which Kanban cannot be applied," said Arthur. "That is right," I replied. "Some years ago at the electronic engines factory I mentioned before, they formed cells and reduced setups, but they decided not to apply the Kanban system, and that was okay." "Why?" asked Arthur. "Mainly for two reasons: The first was the great quantity of engines produced on customer demand; this implied that all the engines were produced by short production series and lacked page_106 Page 107 standardization of parts. The second was because of the great fluctuations in orders from one month to the other. Having a Kanban warehouse would have implied having great quantities of parts in stock, which would not be regularly consumed. Thanks to two emerging factors that simplified their work significantly, they originated (in lieu of Bottleneck Management) what I called the theory of Clever Output Manufacturing . This is my own system." Clever Output Manufacturing: PostReengineering Planning System "What were the two factors that simplified the Bottleneck Management?" asked Arthur, considering situations in which the application of Kanban is not possible. "The first is that an electric engine is a product set consisting of only a few pieces, and the second is that cells were already in existence at the factory. Clever Output Manufacturing is a natural evolution for process- and cell-based manufacturing. Let me explain: An electric engine is a set consisting of only a few components: stator, rotor, axle, frame, and covers. The production starts by cutting the stator-rotor metal sheet, followed by a thermal treatment. Then the engine is wound and conditions are tested. The engine is passed through a machine, and then the axle is placed inside. The frame and covers are also passed through a machine, and then all the pieces are assembled. This is a simplification, because there are 50 operations in all. The factory had already formed about 25 production cells, and they were working actively on the reduction of machine setups. So I introduced Clever Output Manufacturing as a combination of finite scheduling techniques and cellular production. First, we identified the bottleneck cell, which was the one that wound stators at the factory. We analyzed the bottleneck cell to see which sequence of engines optimized winding-machine setups, and which bottlenecks were within the cell." "Oh, I see. By gathering products with similar setups, it enabled the maximum productivity of the bottleneck cell, right?" commented Arthur. page_107 Page 108 "Exactly! And maximum productivity at the bottleneck implies maximum factory output," I replied. "In addition to this, through a time shift, we went back from the bottleneck cell (the winding process), which indicated when other supplier-cells had to start their production. Those cells with long lead times, such as the ones that produced engine-rotating units,

started the production of components before those with shorter lead times, such as the ones that mechanized frames. And each cell produced in one day what the bottleneck cell would produce three days afterward. So, if the bottleneck cell (stator winding) on day 20 worked during three shifts to produce a series of stators with similar setups, on day 18 a cell that worked one shift a day started the mechanization of their corresponding frames. And since the factory was organized in cells, programming it was much easier and more precise." "I understand," said Arthur, "that the cellular organization simplifies any type of later programming—there is no question. Another alternative I am finding in the market to solve MRP deficiencies is finite scheduling software. What do you think of it?" Finite Scheduling "Nowadays," I answered, "finite scheduling is a big hit at many companies. In a way, it is the philosophy behind Bottleneck Management made into computer software. Once production bottlenecks have been identified and once the capacities of machines and setups have been loaded, it provides the best production sequence as an output, which optimizes the line output. It is a great complement to MRP. It helps address the problem of developing optimal production sequencing, and in this sense, it calculates the net production to be manufactured from the MRP and assigns products and sequences to each factory work center. "Since the MRP software incorporates the philosophy of Bottleneck Management, all the caveats I pointed out to you when we made reference to that theory earlier apply here as well. I prefer, if possible, to apply the Kanban approach for two page_108 Page 109 simple reasons: (1) it is a tool that involves the workers, and (2) it enables a continuous improvement cycle permanently fixed within the cell. For example, at a company that produces injected plastic products, a Kanban for its finished goods was designed. That is, each item required a certain lot size and level of replenishment. When the stock reached that level, a card moved to the line of injectors ordering the production of a replacement lot. In addition to this, the line workers classified and grouped orders of similar setups to minimize changes. This resulted in a pull system with sequencing based on orders and on optimization of setups, as any finite scheduling software would, but with the advantage that the worker's mind worked constantly in line with reality. "The other recommendation that could also be applicable here is the following: if the factory is totally organized in work cells, in those cases where Kanban is not applicable (varied and short series productions), the application of this software improves enormously with production cells." "If this is the case," asked Arthur, "why is finite scheduling software more popular than Kanban and cellular technology?" "Because it is much easier in the short run to apply finite scheduling software than to change the factory's culture, organization, processes, and incentives," I replied. "But this is what really ensures a true competitive advantage. It also depends on management's comfort level and ability to pull off an ambitious change project, such as Phoenix." I wanted to get us back on a strategic level, but Arthur's appetite for information was insatiable. I was speaking his language. We pressed on. Electronic Kanban "Can Kanban be applied with a computer?" asked Arthur. "Yes, there are integrated software systems that include a Kanban module within the MRP function. "Through this software, the immediate identification of a lot restocking level and communication with the previous sector are done electronically. The previous sector must be a cell, not just a page_109 Page 110 group of machines, so that this procedure reaches its maximum potential. The electronic Kanban can be used to manage the purchasing process. In the case of a purchasing Kanban, it can communicate via the Internet with suppliers. This is very useful for companies that,

due to the high volumes and diversity of items in their Kanban storage, have difficulty using visual identification. But visual identification, as long as it is possible, is desirable, because as the Japanese say, there is nothing quicker than the eye, even though this requires a disciplined approach to locating each item at a certain location." Kanban of Raw Material and Finished Goods "Can Kanban also be applied to resupplying and delivery?" asked Arthur. "That is right. You can create raw materials Kanban that sends an electronic signal to the supplier, once certain purchase lots (types and quantities) and replenishing levels are determined. This was implemented in an auto parts company where I conducted a change project." "Why would one do this?" asked Arthur. "In this case, because they had severe problems with stock management; they either ordered materials they already had in stock, or did not order enough of what they really needed. Mistakes loading data onto the computer system and time shifts caused this. With a visual Kanban connected electronically to their suppliers, they solved their problem. They also reduced management and administrative time required in placing commercial orders, which in turn allowed them to reduce stock buffers and contingency orders to mitigate delays and shortages." "And what about a finished goods Kanban?" pressed Arthur. "In the case of products with high demand, it is a useful tool. The finished goods warehouse is 'Kanbanized' so that it pulls from the last production sectors of the factory. Having a finished goods Kanban ensures a 100 percent service to our clients." page_110 Page 111

Figure 9.Kanban of Raw Materials "Does this apply to distribution centers, such as our branch offices?" asked Arthur. "Yes, but let's talk about this in our next meeting." "Okay, John. What I see is that according to this new production model, there is a general tendency to move tasks to workers or decentralize a number of incidental activities normally done at conventional factories," said Arthur. "Kanban is a production sequencing system, decentralized and in the hands of the workforce." The Decentralized Factory "Yes, and not only that," I replied, "it also involves re-training workers in a cell to do their own machine setups and not to depend on specialists all the time (normally their supervisor). They also learn maintenance tasks. At a cell, all the members of a team already know the sequence of every product they are responsible for because they are all predetermined by the processes. It is not as before, when workers needed a supervisor to tell them which machine to use or what piece to produce. The workers in a cell, according to their competencies, control the quality of the products they are manufacturing. Also, something I

didn't talk about is that whenever possible, focalized distributed mini-warehouses can exist at the cell level." "How do they work?" asked Arthur. page_111 Page 112

Figure 10.Kanban of Final Products Focused Warehouses "Before talking about focused warehouses, first let's analyze conventional operations at a warehouse of materials coming from a supplier. Let me tell you all the steps that are taken. Normally, a supplier delivers his material at a receiving area or docks. Then, materials are moved into the warehouse. From there, they go to the factory, and then to the machine that requires it. At the end of the day, what has not been used at the machine gets returned to the warehouse." "Yes, I know that, but what do you suggest?" asked Arthur intrigued by the possibilities implied in this idea. "To start, let's minimize the backflow of unused materials to the main warehouse by installing a focalized mini-warehouse or storage areas within the cells that are directly supplied by outside vendors—the idea is to decentralize. If the factory has already implemented raw materials Kanban with suppliers, we would not only recommend having focalized warehouses, but also focalized Kanbans at the cell level. It works like this: When the supplier delivers raw materials to the factory, it delivers to the cell the materials consumed by the cell in one operation (not three or four, as generally happens). If there is a raw material Kanban in existence, the vendor/supplier delivers directly to the Kanban of the cell." "This would mean assigning storage spaces to each cell," added Arthur. page_112 Page 113 "That is right. The idea is that the workers within a cell are in charge of the loading and downloading of materials into the mini-warehouse, or the Kanban of the cell—decentralizing activities. Workers will be very interested in checking and verifying that they are receiving the quantity and quality they requested, because this directly affects their production as a cell. With the exception of certain items that normally remain at the central warehouse, the rest of the stock is kept at the small warehouses controlled by workers." "The supplier then has to know to which cell he has to deliver, and adequate places of delivery should be pre-determined," added Arthur. "That is right, and this is considered in a program of partnership with suppliers," I replied. "I have seen companies that started asking their suppliers for just-in-time deliveries,"

commented Arthur. Partnerships with Suppliers: How to Start "In fact, you need to start just the other way around," I replied. "Instead of demanding this service from your suppliers, you must help them prepare to meet your needs; it is in their own best interest to be able to sell to you, their client. For example, if you want suppliers to deliver frequently and in small quantities in response to raw materials Kanban, you don't have to ask them to place a warehouse packed with stock of their product next to the factory." "Why not?" asked Arthur. "Because suppliers pay a high cost for this. They have two options: to include that cost in their prices, or to go bankrupt. Neither option is good for you, either. What we should do is teach suppliers how to form cells and reduce setups so that they can deliver small quantities to your cells in an efficient way. We can share our know-how with suppliers and build a better relationship. We can tell them: 'I made this tremendous change effort. Now you have to accompany me. I'll teach you how to do it.' But to achieve this type of relationship with your suppliers, there is a basic premise: Plan the relationship as a long-term commitment, because if you page_113 Page 114 don't, no one will bother to work with you. That is why the first step in a good relationship is to make the right choice of partners, like in a marriage." "What does the supplier get from all this?" asked Arthur. "One benefit is that he will be the only one selling to you, or be one of the two or three exclusive suppliers to the factory. He can also substantially reduce his costs in several ways. First, the formation of cells and the reduction of setups at the supplier's factory will reduce his costs, independent of whom he delivers to. Then, because the implementation of techniques such as Kanban at the client's factory requires sharing information with the supplier, this allows for better planning of the supplier's production. This closeness between clients and suppliers also offers many opportunities to reduce costs. For example, when Kanban is implemented between a factory and its supplier, they can use returnable boxes instead of conventional packaging. There are lots of ways to reduce cost." "I understand," said Arthur. "I'd like to ask you one last question on this topic That's been nagging me for some time. Once we reduce in-process stock in our factory, aren't we vulnerable to a shortage of parts if a machine breaks down? We wouldn't have enough stock in front of that machine to keep the next process going, and we'd have to stop production." "First of all, Arthur, we have to start reducing in-process stock. If the maintenance of bottleneck machines is deficient, then that becomes an important restriction, and one the team in that work cell should wrestle with first. That is why it is essential to have workers become involved from the beginning with the elementary maintenance of their machines. Training in the proper use and ongoing maintenance of the machines increases the mean time between ." failures PM — Preventive Maintenance "Do you remember one of those old American war movies in which the sergeant tells his soldiers to give their guns the name of a woman?" page_114 Page 115 "Yes, I do remember. Why did they do that?" asked Arthur. "So that the soldier learns to love his gun. This is the same principle we need to apply in the factory. Workers who love their machines take good care of them. And as the soldier cleans and oils his gun, the worker needs to care for his machine and assume responsibility for any repairs that might be required. It's his 'baby' now, and any breakage is his responsibility and no one else's. Of course, he can call the 'doctor' over in the Maintenance sector, but can you

really trust the doctors here to take your baby apart?" Arthur gave that funny look for the third time today; I returned his smile and said nothing more. "Okay, if you say so, John. And how do you achieve this?" asked Arthur. "Easy. You teach the workers of each cell basic maintenance tasks: oiling, changing chains or gears, and any other minor tasks that will make them feel involved with their machines. By the way, this is another example of factory decentralization." "Thanks, John! I think today's immersion has been both shocking and also stimulating. Why don't we start preparing the plan for the next board meeting?" "Fantastic, Arthur. But this reminds me that this plan not only involves a task breakdown and a time chart, but also the assignment of your best workers—the best 'brains' you have to offer the Phoenix project. Something else I want to tell you is that I think what we have been talking about—cells, setups, Kanban, etc.—are irreversible changes in productivity improvement. It is not just another management fad. With different variations, this can be applied to all types of industries: textiles, flour mills, foundries, metallurgy, electronics, pharmaceuticals, refineries, and plastics in addition to hospitals, hotels, and financial companies. Particular implementations will be different from place to place, but the essence of PBO is the same. Believe me. It is the way of the future. Arthur smiled from ear to ear. "John, thanks for coming to see me today. I am starting to get the big picture about this new concept: Be passionate at work, appreciate the workers, marry your suppliers, and love your machines. I am really starting to like the sound of this. I heard Klaus earlier talking about Team Emotion or something page_115 Page 116 like that. I have to admit, I wasn't in a good mood this morning to hear about it…but is that what we're talking about here?" "Yes and no, Arthur. Don't lose that thought—we can discuss Team Emotion some other time. We still need to wrap up the actual overhead slides to present to Martin, but I believe that with all the ground we covered today, you should be in good shape. Can you take a stab at a first draft? We can review it tomorrow." Arthur nodded his agreement, and on that final note I took off. It had been a long day and I was tired, but I was really happy with how things turned out. Factory Automation Early the next day, I went back to my office to catch up with the usual office management duties and to prepare the information for the Control Board required by the company's main office. When I finished, I sent an e-mail to Martin so that he could take a look at my work before I sent it out. Fifteen minutes later, he was walking into my office building at a brisk pace. "John John!" Martin called from across the hallway. "Good morning. I know that I am getting ahead of things, but I need to adjust my budget today, and it is important that I reflect any increase in factory investments for the next quarter. I am assuming there will be technical changes, and I'd like to plan with you how Phoenix will impact our cash flow." We walked together to my office, and at my suggestion, we stopped for a cup of coffee. I wanted to slow down his thinking a bit while I stepped up mine to his level. I took three minutes to brief him on the events of the previous day and on my meeting with Arthur before addressing his budgetary concern head-on. "Look, Martin. Remember what we once discussed about spending? Among the best qualities of a CEO is how, when, and how much working capital he assigns. You've always been very good at forecasting expenditures when it comes to the factory, and I wouldn't want to see you spoil that record. Agree?" "Of course, John, but I realized last night how critical Phoenix is to the survival of our company, and I wouldn't want to jeopardize our pilot for lack of funds. I've learned that lesson the page_116 Page 117 hard way with our previous change project; I'm sure you heard Arthur talk about that."

"Yes, I did, and that is what probably fueled the good dose of healthy skepticism regarding change he showed me last night. But as I told him, during the first couple of months, we will not have any significant extra expenditure in the factory. What we need to do first is reduce set-up times for the critical machines. The idea is to advance as much as possible in setup management and other basic organizational aspects, and then if technological improvements are still needed, we will work on the most elementary ones: we'll start first with the factory Engineering and Maintenance personnel, and then look outside. "Once the cells are designed and formed, there will be expenses because of machine relocation, and we will need Facilities and Maintenance personnel to help with this. Of course, the ideal is to leave 'monuments' in their current place, and move other machines around them. The Kanban will require a physical rearrangement of the warehouse, and perhaps we might need to buy plastic bins and boxes to achieve the level of order required by the system. "We should do the personnel training instead of outsourcing it, with perhaps two or three specialists from HR/Training and Development to help us prepare the presentation materials, handouts, etc. For the most part, training should take place within the cells and by the leaders of each area. We can fine-tune this later with Klaus; he and I played around with some ideas for workers' learning in action or Action Learning. For now, think of training not in the traditional way with classrooms and talking-heads, taking lots of time away from the shop-floor, but as part of the communication and reeducation process, and as an integral part of the Phoenix change plan." Martin was starting to relax a little. He commented on making some minor budget adjustments in professional services and overhead to cover the activities of the next three months, as I had just outlined. He also expressed relief at not having to change capital investment line items in his budget, which would have meant several millions of dollars—not the thousands I had estimated. He noted that we will need to invest in technology at some point. page_117 Page 118 "That is true. But we don't want to place the cart before the horse. Let's avoid the mistake that many car manufacturers made in the 1980s when they considered technology the first and foremost element of change. It is more important to first build the foundation of change, reevaluating and innovating how everything is done (production, programming, procedures, organizational culture), and then consider if technology is still needed to obtain and sustain the expected results, and not just change for the sake of change." Martin understood this, but as a good leader and manufacturing executive, he knew that at some point his beloved machines—nuts and bolts, chains, levers, and digital displays—would come into play, and he wanted to be prepared. "But, John, brainstorming on your previous experiences, can you tell me how technology can be incorporated later on?" "Okay, Martin. Let's separate technological innovations into two categories: the first one relates to machines, the second to information systems. let's concentrate for now on just the first category: manufacturing technology." Manufacturing Technology "Once we change how the factory is organized for production, by basing everything on processes, you will have cells all along the manufacturing track. The next step, from an optimal cost-benefit point of view, is progressively to automate the cells, as Arthur and I discussed last night, with small automation steps designed by the factory personnel (Engineering and Maintenance typically head these efforts). As a result of the first few steps, you can take advantage of having more machines next to each other performing similar processes. Then we can start thinking about what to do with the workers' freed-up time, while letting the workers think of the advantages of having several machines assigned to a cell, now working on the same process." I moved on to the next phase. "Once we have taken advantage of all the opportunities offered by this new way of working, we can take the second step: replacing the less-sophisticated machines in the cells with more technologically advanced ones that can perform several stages of page_118

Page 119 the process (for example, a mechanized center at a metallurgical plant). But we have to carefully reevaluate the cost-benefit analysis after each step we take. Believe it or not, I've seen cases where because of the degree of problem-solving ingenuity applied by the workers in a previous step that resulted in higher-than-expected productivity increases, justifying certain investments became difficult." Martin was quiet now; his thinking was churning faster than I could keep up with, so I waited a fraction of a second to try to interpret his body language. A single nod gave me the okay to move on. "So, as I was saying, the replacement of machinery within a cell is also different from the traditional technological upgrade criteria, due to the fact that now super machines with supercapacities, which are excellent for producing exclusively one product, are not advantageous if what we need is to be flexible and to manufacture short series. Sometimes it is more convenient to have small machines for specific products, which minimize the number and length of setups. For example, in the case of textile companies, big dyeing pans are, in my opinion, inefficient compared to smaller pans designed for specific products." Martin still looked unconvinced, so I gave him an example where technology does not match strategy. "Another example is warehouses. As an alternative, some companies use automatic storage and retrieval systems . These are highly automated warehouses where an order received from a worker on the shop-floor via computer causes the parts from a specific location in the warehouse to be delivered immediately, using vehicles that move around the factory guided by infrared beams." Martin at that point stepped in and added to what I had just said: "But if our objective is to reduce in-process stocks in the production chain, including raw materials, what is the sense in that kind of investment?" asked Martin rhetorically. "I believe we can increase warehouse productivity just by having focalized mini-warehouses at the factory controlled by workers." "I entirely agree with you, Martin. Probably the most economic thing to do would be to automate focalized mini-warehouses and storage areas in each cell." I moved on because I wanted to blend in the Information Technology. page_119 Page 120 "The third stage in manufacturing technology is a CIM (Computer Integrated Manufacturing). This is a totally computer-based integrated factory that uses information systems technology. A host computer receives production orders and sends them to CAD/CAM (Computer Aided Design/Manufacturing) systems—the robotic systems that will manufacture selected pieces. Working centers are connected to warehouses through AS/RS (Automatic Storage and Retrieval Systems). In a way, they represent a factory that works in the dark, which is why they are sometimes called 'lights-out-manufacturing'—there is practically no human intervention. A number of factories work like this around the world, though not as many as futurists thought we would have by now. The problem is purely one of cost vs. benefit." "Do you mean that they are not profitable?" asked Martin. "Oh no, they can be profitable, but it depends really on the products they manufacture, their pricing, and their production volumes. What I'm saying is that in general terms, most factories are finding that the most cost-beneficial solution is to use a combination of CIM and just-in-time manufacturing, which I'm calling here cell automation ." Martin wanted to know more, probably trying to figure out when they'll be ready to introduce the sophisticated technology that he envisioned in his factory. So far he was following the practical logic of my argument. Cell Automation: A Technological Solution for Today "What is cell automation?" asked Martin. "Simply put, Martin, it is the systematic and orderly evolution toward CIM (Computer Integrated Manufacturing). I am sure that all factories will use this type of technology in the future. The difficulty rests in the transition and its timing. The first step in the transition is

forming production cells with the machines we already have. By doing this, we gain something: we form a flexible manufacturing process based on work cells, with simple machines that are similar to the ones we will have in the future. Today, this cell and its people have a degree of flexibility that get us halfway to the cells we will have in the future. This staged approach gives us a cost-benefit page_120 Page 121 scenario that we can afford today. Then, as I was telling you earlier, as long as the costbenefit ratio justifies it after each step, the cell is progressively automated with better conveyors or robotic arms between machines or, say, by replacing some of the older, simple machines with numerically controlled ones. Following this natural change process, we manage the gradual and orderly transition toward full Computer Integrated Manufacturing or a mix of methods and technologies, as we mentioned earlier. It is just a different investment criteria being applied, which is quite different to our Western investment philosophy." Martin was now leaning back in the chair, legs stretched out and crossed, his budget papers neatly stacked on the floor next to him. He looked directly at me and said: "Very different… I can see that now, John. Investments in change are not just monetary. We tend to see just the capital investment needs that are dictated by the final stage of the change process, but not the intermediate progression and the human effort that is needed to get there. The issues You've touched on"sustainability of the change by creating a natural organization, an organic cell that learns and evolves like an intelligent being with feelings and emotions; people and tools, side by side, with clear goals and measures of success that take into account the individual and the team; and emotions with productivity and profits—describe an investment strategy that is natural. "And what about the other aspect of technology incorporation—the one related to information systems?" asked Martin. Computer Systems Technology "To talk about this, it is best to divide it in two parts: first, the advantages of having an integrated information system, and then the synergy between an information system and the process-based organization concepts we talked about before. The main advantage of having a fully integrated information system is that all operations can be done online— communicating to and from the computer through terminals across the plant, offices, and warehouse. This will enable workers and managers to make 'real-time' page_121 Page 122 decisions where action is taken as fast as the information on which to make the decision becomes available, in other words, in time to really affect the decision-making process. Performing operations online also eliminates unnecessary paperwork and menial tasks that numb the human intellect, creating in the process a repository of information that everybody shares." "This can be very interesting for us," commented Martin, "since we have constant engineering changes due to new designs. This will enable us to follow up on products being manufactured and engineering updates assigned to them." "Another advantage of having an integrated information system is that you can manage preventive and predictive maintenance systems and update equipment history as a source of information and permanent control," I added. "But of course, having a unique database that integrates all sales estimates and stock information with production control and cost systems requires the company to do its homework. That is to say, it requires the company to work according to pre-established procedures, which is an important advantage in and of itself. But investing in computer systems technology must undergo the same reasoning criteria we discussed in manufacturing technology: Analyze the investment cost-benefits, exhausting alternatives that take advantage of organizational intelligence." "I imagine this has to do with the second thing you want to talk about: the synergy between integrated information systems and post-reengineering concepts." Martin was alluding to a

prior conversation we had on the pros and cons of reengineering processes without a global view of the organization. "That's right, Martin. An integrated system at a conventional factory is one thing, and an integrated system at a factory organized in production cells is another. The synergy obtained in the second case is much larger than the first. The factory organized into cells is by default already a productive factory. The integrated information system is the icing on the cake." "I see. Can current integrated production information systems manage cells?" asked Martin. "Yes. The most advanced ones do. The advantage of having cells, and not a group of machines, is that cells work as a 'black box' for the system. In other words, as long as you know what page_122 Page 123 goes in and what comes out of the cell, how the cell or black box functions is of no concern to Planning and Control. It is much simpler this way, since each cell controls its own output (finished goods). The cell knows precisely that piece X requires a certain quantity of raw material, time, and labor in its process." "And what about the programming system in itself?" asked Martin. "Generally, these systems include MRP (Material Resource Planning). Most advanced systems include a Kanban module and a Finite Scheduling module. The selection of Kanban or Finite Scheduling is an important strategic decision because, in my opinion, the first one integrates people and forces efficiency to be improved progressively. But in the second case, the technical alternative of finite scheduling controls cells with pull concepts, which are incompatible." "Does the implementation of a Kanban module in any of these systems imply an important cultural change?" asked Martin. "No, not the system in itself, but its operating philosophy. If you have a Kanban warehouse for the cell's output, and the Kanban warehouse is integrated to the information system, the workers in the cell should be the ones loading the data into the system. Or even better, if bar codes are used, data entry is greatly facilitated. But the most important changes are philosophical and procedural: The discipline and conviction required by Kanban, in comparison to order philosophies, imply producing just the quantities ordered by Kanban and simultaneously reducing set-up times at the cell level." "Have you applied this same Kanban philosophy at other companies, both for suppliers and clients?" asked Martin. "Yes. Working with raw materials and finished goods Kanbans, these companies were connected by the Internet to suppliers and to clients respectively. These Internet connections of business-to-business and business-to-client directly accessed the initial cells of the factory or supplier. When their Kanbans are empty, a signal is sent to the corresponding suppliers. From one end, clients placed their orders on the Internet, and from the other end—the finished goods—Kanban delivers the product and triggers a signal for the replenishing process to be executed by the last cells of the manufacturing sequence. All the information related to page_123 Page 124 loading, orders, and operations converges into an integrated system with the purpose of management control, cost analysis, and administrative relationships with suppliers and clients." "You know, John, the deeper we go into this, the more sense it makes, and the more anxious I become," said Martin half seriously and half joking. "Why? Are you still concerned about the new equipment budget for next quarter? Let me reassure you—" Martin gave me a "time-out" signal. "No, no, no, nothing of the sort, John. In fact, I am convinced now that there is no other way for us than to start at the foundation. But you see, this is such a philosophical departure from the way we're used to thinking and there is so much to learn—I am really concerned about my managers. Even if they are 100-percent on board with Phoenix, can

they change the way they think about ? And let's not stop there: Can manufacturing they change the way they think about people and organizational culture ? You know, there is a lot to absorb. Is there anything like an Action Learning for Managers, where they wouldn't have to go away for two weeks to learn this stuff? Or is that just for labor training?" "There is such a thing, Martin, and I'd love to chat with you about that sometime. Indeed, managers have a lot to learn," I replied. Then it hit me that the morning was almost over. I didn't have to look at my watch; Martin did that for both of us. "Wow! Look at the time!" exclaimed Martin. "I need to go now, but before I forget, let's set up a meeting to go over that Action Learning thing you mentioned. It might be exactly what the doctor ordered." "Of course," I replied. "As soon as we are finished here, I'll call your assistant." page_124 Page 125 4 Process-Based Organization During the following week, Arthur and I continued preparing for the meeting with the directors, developing a preliminary timeline, defining key milestones, and selecting the team for the redesign of the factory. He was a quick study, and seemed very experienced at developing a work breakdown chart, assigning tasks to key people, and redirecting work to other areas on the fly. The more he saw things come together on paper, the more confident he felt. My presence wasn't really necessary, but I promised Arthur I'd stay in touch by phone in case he needed me. I would be meeting with Robert and Susan the following week, after the presentation, to kick around a few ideas about the redesign of the Administration and Commercial Departments. I went back to my office. Time went by faster now that the Phoenix project was underway. That mythological bird was starting to raise his head from the

Figure 11. Functional Cell Configuration in a Consumer-Goods Enterprise Page 126

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ashes of inefficiency and waste—a very opportune thought, given Martin's parting remarks at our last meeting: "Even if they are 100-percent on board, can they change the way they think…?" I kept on hitting the keys on my laptop as I prepared an outline. I wrote down some ideas for the meeting with Susan and Robert while I sat at my desk, enjoying a bit of quiet solitude. Ashes, birds flying, creative destruction.… Yes, what else do we need to burn and turn to ashes in the Administration and Commercial Departments so that Susan and Robert can emerge like the Phoenix birds in flight? There are no machines to set up, warehouses to decentralize, and no in-process stock to reduce like at the factory. Instead, they had piles of paperwork surrounded by armies of people, procedures, power, attitudes, and politics. Will they be willing to burn some of that? As I typed, it struck me that thus far in the project, everything had gone smoothly and nothing out of the ordinary had happened. Arthur had displayed great intelligence and flexibility in accepting new ideas, but I would not have expected any less from him, given his intellect and reputation. After our meeting last week, I had no doubts of his abilities. But attitudes are much more intangible aspects of human beings than intellect; they are much more difficult to handle. Can one really be separated from the other? I had worked on similar projects with dozens of production managers, and I was starting to believe that there is a certain kind of person who typically works as a production manager—a typology, perhaps, that I developed after seeing the different ways people reacted to the challenges posed by process-based organization redesign. Generally, production managers were cut-and-dry, no-nonsense people who either liked an idea and accepted it, or rejected it right away. Perhaps this was a style induced by the cutand-dry, no-nonsense rules related to the operation of a factory, or maybe driven by the need to communicate in a concise way and transmit as clearly as possible. But there is a paradox in all of this: As a consultant, I must be able to communicate in clear-cut terms to these production managers the many shades of gray involved with a massive change project. A great responsibility rested on my shoulders. Until they page_126 Page 127 felt comfortable with the concepts, familiar with the new terms, and somewhat reassured of their personal success, ownership of the project was a mini tug-of-war between them and me. Until I resolved the issues of ownership—one by one, little by little—the outcome of the project would stay in that dangerous zone, that limbo that destroys so many change projects. The production managers have to emerge as the true owners of the change; when this happens, the signs are clear. The resonating synergies within the teams carry things forward as if everyone in the organization were marching to the beat of an invisible drum, where the rhythm is as contagious and invigorating as the sound of salsa on carnival nights. This critical milestone was not in the charts, only in my head. And we were not dancing yet. My past experience with change projects (especially with the implementation of advanced concepts of process-based organization) in the Administration and Commercial sectors has been that even when the work cells for office environments are less technologically complex compared to those implemented in the factory, they are much more complicated in the human aspect. In the factory, the mid-level supervisors showed the most resistance to changes. Workers, on the other hand, were much more willing to communicate with each other and share opinions, and were not afraid to be heard. The more naturalistic approach outlined by a PBO strategy was always well received by the workers; the reaction was always positive. In the Administration and Commercial sectors, however, the initial advantage that existed with workers in the factory area was lost. Office workers were normally paid more attention to than factory workers. Several factors account for office workers' predisposition to resist change: frustration with past office projects that had failed to fulfill their expectations; disillusionment over poor implementation of computing systems; functional limitations in office information systems that created more work, took more time, and created divisions within their ranks; the implementation of total quality meetings, where employees were lectured on important philosophical concepts that had never been turned into concrete

practical improvements; and the list goes on. page_127 Page 128 Changes within the office structure produced inevitable shifts of power and political alignments, and resulted in inactivity due to impending changes. All this made projects in the dministration and Commercial Departments much more difficult to plan, manage, and execute. Nevertheless, the vital need to include these sectors in the change process heightened the need for careful preparation of people managers, considering the need of a smooth transition and the managing of expectations. The situation worsened as the changes in the organization involved higher management levels. I thought I heard a soft knock on my office door. As I started to get up from my desk, Martin poked his head in. The ghosts of changes past vanished just as subtly as they had materialized. Martin's appearance brought me back to reality. These days he preferred to meet in my office, away from all the noise at the factory and interruptions from well-intentioned employees wanting the boss to be "in-the-loop." He told me once that the worst enemy to getting things done was people popping in and saying, "Martin, you got a minute?" I was expecting him. Initial Communications "Good morning, John," said Martin, getting right down to business. My assistant had already given him a healthy dose of caffeine, and he was ready to go. "I believe we must start considering how to communicate all this to the organization. Even though we are still preparing charts and timelines, I am worried that word might get out before we're ready to talk. You know that this type of news usually circulates fast around the company. I want to be the one to transmit the official version to everyone." "I think that's a healthy approach," I answered. "I was just thinking about going over this with you." "To tell the truth, John, I still do not have a clear idea of exactly what to tell them or how to launch this communication campaign." "The fact is, there are no standard rules for this, Martin. The 'what' and 'how' have to do with the culture of the company page_128 Page 129 and the way decisions are usually communicated: open and frequent, few and far between, en masse as in a town hall meeting, or trickling down the chain of command. It really depends on your communication style and what you are most comfortable with. Also, look at what has been effective in the past: What historically has happened in reality after the communications? There is no unique way of communicating what is going to be done to the company. You can use a variety of channels simultaneously." "I thought about sending a personal letter addressed to each of the members of the management group, explaining our strategic vision and focusing on the idea of change and growth so that no one feels that their positions are being threatened," he offered. "That's not a bad idea, but I believe you should not be limited to only one channel of communication. If the objective of this plan, among others, is to rescue the passion and the mental synergy of the organization, we must follow other roads as well; we must get much closer to the people." "I see what you are saying. Do you think preparing a videotape of me explaining the Phoenix project, our vision, and our mission and sending it to every unit in the company will be better?" asked Martin. "Absolutely not," I replied. "I don"t think the projection of a video in which you explain these concepts to people would be the best idea. You need to get closer by having more two-way dialogues with the employees, such as what you and I are having right now. Especially in the initial stages of the change project, there is nothing better than a face-to-face contact with all the staff." "But John, a dialogue? There are more than 2,000 people working here. How could I possibly have personal contact with all of them?"

"We will have to find many creative ways to do it. For example, I would suggest that you have an initial talk with all the second-tier staff and with all the managers and supervisors to transmit the objectives of the project and to present the vision of the new company." page_129 Page 130 "Do you think that I should prepare a presentation? Or should we be prepared for an open forum? What are you recommending?" asked Martin. "I believe that there should be a short presentation with a question-and-answer session at the end of the talk. If there aren't any questions, it would mean that most people felt afraid to ask and that the spirit of the meeting was not understood," I answered. "Okay, then what should I do if they ask me something we still don't know, such as if the organization chart will remain as it is today?" questioned Martin. "Look, Martin, you've always talked about having open and honest communications with the staff. Why change now? I believe the best explanation is to tell them what you know. We have no idea if the organization chart, with respect to positions, will remain the same or not. But the thing you do know is that you recognize the importance of our human resources and that you know the intellectual potential of the people in the organization is an actual advantage. Your primary objective and the goal of this company, this project, and your directors is to expand the business, not reduce it. This is not a personnel-reduction exercise. We do know this." "Okay, and after the meeting with the managers, what should we do?" asked Martin. "A possibility is that the managers discuss this vision (their vision and our vision) with their subordinates in groups of not more than 20 people each. This might mean that managers will have two or three consecutive meetings where issues will come up. We want to hear what those issues are so that we can address them later." "Do you think managers can transmit these concepts at the initial stages of the change process when they still do not have a clear idea about where we are going?" asked Martin. "That's a good point, Martin. They won't have all the answers at the beginning, but neither will we. So initially, managers should transmit basic concepts they feel comfortable communicating, using the same overheads and slides you used in your meetings, and transmit those messages related to reassurance and confidence building that we mentioned before. The important thing here is page_130 Page 131 that each manager must talk. Anyone with employees at any level reporting to them should be prepared physically and psychologically to talk to their direct reports. This means they will have to have the latest and most up-to-date overheads on the state of the actual changes achieved and status of the Phoenix project. Also very important is that they be reasonably convinced or else raise any issues or concerns if they are not. You know that when people express an idea, they gradually start to internalize it, and of course this carries over to their communications." "Then what you are saying, John, is that even though managers are not convinced at the beginning (which is to be expected), when they have to support it publicly, they start incorporating it in their own thinking and defending it," commented Martin. "Yes, this usually happens if they are at least partly reassured that the organization will not dismiss them. Something else that usually happens, which is quite beneficial, is that subordinates usually believe more in their immediate superior than in their company's president. There usually is a higher level of trust with your direct boss." "Why do you think that is, John?" asked Martin, with a slightly skeptical tone. "Because their immediate superior is the person who is closer, who works with them all the time, who resolves any inter-personal problems, who gives them feedback, and who ultimately rewards them for their work. They are the ones who will offer an honest answer and who will build up confidence when needed. At least some of the time." I added that last caveat as a premonition to the smile that was now forming on Martin's face; he knew more than he was letting me believe.

"I understand that," said Martin, "but I believe it is also possible to have a manager who will show great commitment to the project, but then when communicating the project to subordinates will give contradictory messages." "True, I've heard them—phrases such as 'Let's see if this really works' or 'This might just be another management thing,' or 'Don't worry, this too shall pass.' All of this drift takes people away from productive work. Drift also lowers morale, and we can't afford that." page_131 Page 132 "Exactly," said Martin. "In those cases, you first need to talk to the manager to check if they think that way. Those managers need hand-holding. They need help getting through the change within them before they can help others." "So let's say we explain everything to these managers, try to understand their motives and worries, and offer our support. What happens if they still can't reconsider their position?" "I think you already know the answer," I replied. "Look, Martin. We have already talked about this. There is no 'human change instructions manual.' Things get even worse when a redesign results in different organization charts. We need to be sincere and sensitive to people's worries. It is also important that Klaus, your Human Resources director, works side by side with us in handling communications and managing people's expectations—the expectations of not only people afraid of losing their jobs, but also of those who lose faith in the company and its managers. The downside is that good technical people and even some good managers might not understand, get anxious, and 'jump ship' or leave the company." 'I think that Klaus will be in charge of a complex and stressful task. I don't know if he is prepared for this," said Martin, looking at me to complete his thought. "There are not many Human Resources directors prepared for such drastic changes like the ones involved here. Becoming a process-based organization is not an everyday occurrence; it includes changes in incentive systems, personal adaptation to cell structure and new teamwork requirements, leading more than managing and supervising. The state-of-the-art on change project management of this magnitude is in its infancy. This is not a science. But believe me, Martin, the recipe for success always contains firm direction from the top (that is your responsibility), intelligence in the development of technical solutions, and sensibility and honesty in dealing with people during the transition. But really, there is no how-to manual for organizational change. It has to be developed by each company and adjusted on the go, with intelligence and common sense, based on processes that evolve, an organizational culture that adapts, a technology that is flexible, and by people who care." page_132 Page 133

The Process-Based Organization That morning, I had to meet Robert and Susan to go over in detail the topics we had presented a few days ago. Susan was on time, but Robert, as usual, arrived 15 minutes late and apologized. "I was thinking about the idea that came out in our last meeting," he said. "I believe that if we focus on the quick delivery of lathes, adapting to our users' needs, and we strengthen our delivery of spare parts, we would have a good opportunity, but I have no faith in the factory's capacity to deliver on time what we want. Even today, without any improvements, they have delivery problems." "You shouldn't worry about the factory's delivering capacity, Robert," I replied. "Each person should focus on the aspects of the work that concerns them. It doesn't help Arthur, who is working hard to make the factory a quicker factory, if customers' orders get stuck in Accounting or we're late in invoicing or late in the administration." "Yes, I see your point, John," said Susan. "But if we put that idea into practice and want to increase our market share in spare parts, what we are going to have is more invoices, more small orders of spare parts to process, more collections, and more deliveries to frequent distributors. That will break us." "Yes and more engineering work in the case of lathes. You know, this department is already

a bottleneck," said Robert. "We will also receive more telephone calls from clients asking for spare parts, and this is all difficult to handle." I could sense their frustration and the muffled anger in their voices, so I kept quiet. I allowed them to vent; they needed to tell someone their problems and get it out of their system if I hoped to have a productive meeting with them. I listened for about five minutes to their complaints, their finger pointing, and their own insecurities about change as they let out the emotional steam of their slow-simmering negative feelings. This was not the time for an intellectual debate on the benefits of PBO in the service sector. This was a time for compassionate listening. I owed them that much. It caught them by surprise that I didn't push back. "Robert, Susan: I agree… I feel your frustration too," I answered at the first opportunity they gave me. "But the truth is that we are all very frustrated about not having the competitive advantage page_133 Page 134 within the market that our collective efforts deserve and we are all frustrated that customers are not differentiating our products and services from other products. But we cannot let our frustration take over us or allow our negative feelings to blind us from what we really need to do as a company. We should be putting our energies into looking for ways to do things better, faster, and with less work—not putting it off altogether." I paused for a second to allow them to digest my words. "If we believe the market is asking for this, our premise should be 'Let's see how we adapt competitively to the market.' We have been talking to Arthur about ways of producing short series more efficiently. This would help shorten delivery times, but we must find ways to make administrative short series just as effective." "We will definitely need more personnel," commented Robert. "Not really, Robert. The idea is to find a solution for people to continue working smarter, without getting stressed out. That would enable us to process more transactions and make administrative lead time shorter." "But collections (accounts receivable) will also be more difficult," commented Susan. "We must consider that there will be more invoices to process and more payments to collect, such as spare parts invoices that are sent to multiple clients." "As I was just telling Robert," I said to her, "we have to apply the same principles we developed for the factory, to make everything possible. You might be surprised to know that the post-reengineering concepts that are applied in the Administration and Commercial Departments of companies are practical adaptations of conceptual changes introduced in Manufacturing Departments during this past decade." "What do you mean?" asked Robert. "What I mean is that just as there are functional units at factories—for instance: turners and drillers, where a team of workers perform similar tasks—the same thing can be found at the office. There is a strong division of labor and skill-sets between departments. People who belong to the same department perform more or less the same tasks every day. And there is a high level of human effort, but when this is considered within the company as a whole, we find very long administrative and commercial cycles for sales, page_134 Page 135 ordering, invoicing, etc. But a high level of effort does not imply productivity; it only means more work for the same results. In fact, office work is comparatively lower in productivity, and there are problems caused by poor quality of information, which slows down the overall manufacturing and delivery processes. We see that from the global level." "Is that so? Can you share some cases with us?" asked Robert. "We don't have to go far to see how bottlenecks delay the overall administrativemanufacturing processes; you alluded to some in your own departments. What do you think the overall effect is on customer service and product delivery? Not very good, I'd say. But there are many examples of companies—both industrial and service-oriented—that did what they had to do to successfully compete in their markets.

"Let's look at a textile company. Weakened by the country's import of similar textile products, this company decided to implement a strategy based on launching double their usual product collection in order to compete with imported products and also increase their market share. But they couldn't do that with the way the company operated. The key was to offer their clients a much wider variety of products than their competitors, delivering them within a short lead time. Due to the lack of color variety of imported products, the local company managed to maintain their market share. The new strategy implied big changes in its manufacturing processes, such as reducing the time of replacing dyeing pans in order to adapt the factory to the production of a wider variety of colors. In the Administrative and Commercial Departments, cells were formed to handle this new strategic approach more effectively. Before the change, there were several departments: a Sales Administration Department (also divided into the sub-departments of Order Processing, Collection, and Invoicing), a Factory Programming Department, and an Administration Department (which dealt with accounting, follow-up on client accounts, and collection). Before the redesign, there was no uniformity in delivery times: If a client ordered goods when the inventories were high, the order was delivered on the same day. But when they were low, some orders took 20 days or more to be filled. Not coincidentally, the manufacturing process lead time was page_135 Page 136 20 days, including knitting, dyeing, and completion of the final product. Average administrative-commercial lead times were about 10 days. They worked against levels of available stock. "Administrative processes, particularly some aspects of information quality, functioned well below acceptable levels. There were mistakes in the sales terms and conditions agreed with clients, mistakes in account reconciliations, and basic discrepancies in the system for stocks control. Each client's order was routed through several managers for approval before stocks were finally assigned. "Once the conventional steps in business process reengineering were exhausted (the analysis of value added and sequence of each activity involved in a process, and the determination of the feasibility of using technology), a much more important step had to follow for the strategy to yield practical results. We called this additional step in the change project postreengineering or process-based organization. In other words, beyond just looking at the individual processes and technology needs, the entire company was redefined or reinvented around a new strategy. Process-based organization, or PBO, allows for the orderly deconstruction of an organization (also known as creative destruction), and the reassembly of all its functions around people, processes, and tools. I use the word tools here very loosely to refer to new methods of doing things, like work cells, teams, and Kanban storage, as well as machines and/or computer technology. In addition to that, there is a whole suite of what I call people-tools that might be suitable during the change process." "Can you mention a few of these people-tools?" asked Susan. "Sure. Keep in mind that not all may be applicable here, but there are leadership development tools, employee-performance management tools, coaching and facilitation tools, training and action learning tools, and a whole suite of assessment tools like the MyersBriggs, 360-degree surveys for managers, and individual aptitude tests that can be selfadministered and scored. Also, we have tools to evaluate the level of individual emotional intelligence, and team emotion and its impact on team actions and behaviors. Some of these tools related to emotions in the workplace are based on recent university research." page_136 Page 137 "This is fascinating stuff, John. Have you spoken to Klaus about this? I'd really like to join the conversation when you guys get together to talk about possible applications here," said Susan. "Sure, Susan, I'd be happy to include you and anyone else interested when the time comes,"

I replied. I made a mental note to set up a formal meeting on the subject of team emotion with the management team, but not until we had experienced it long enough in our Phoenix team to be able to engage the group in meaningful personal reflections. Robert had been listening very attentively to my sideline conversation with Susan; he wanted to jump in. "What would have happened if the process of change at that textile company had been stopped before that final post-reengineering phase?" asked Robert. "They would have achieved some measure of success, of course, such as better crossfunctional integration, more efficient and better-defined procedures between internal clients and functional areas, but without adding strategic value to the overall process. There is no question that they would have achieved an increase in individual productivity by stepping up traditional skills training, and even improved departmental functions in the short term. But savings would have been negligible by not going the extra mile—that is, by continuing with the PBO phase. The opportunity cost is tremendously high. Let me outline the potential losses for you: First, they would not have achieved the strategic goal of improving the process globally; second, as the strategic direction shifts, they have to go back to square one and go through the change process again (albeit a smaller effort than before); third (and also related to the second), they have not built a self-sustaining (natural, organic, social, etc.) organization based on processes that evolve and adjust as dynamically as the teams within the cell evolve and adjust to internal and external business demands; fourth, they did not significantly improve the human working condition by allowing the kind of growth and development that is enabled within a cell organization—that is, the organizing circumstance we called the mini-factory or mini-business. I can't really give you a number, Robert, other than to say that the opportunity cost of not taking the time to make the change right is tremendously high." page_137 Page 138

How a Process-Based Organization Optimizes its ERP Systems "Based on what you were saying before, a conventional reengineering project would not have drastically reduced lead times in the administrative cycle either," exclaimed Susan. "No, it would not. The same characteristics of this dynamic flow you find in the factory would have produced bottlenecks in people where paper or bytes of information would have accumulated anyway. These pieces of paper or bytes queue up just like in-process stock does in a factory; these queues of information/stock are responsible for the long waiting time, the main component of lead time." "Would this happen even if we had an integrated system, an ERP?" asked Robert. "Yes, Robert," I replied. "Even if we designed a totally integrated system, as it is being implemented, users would be assigned specific tasks related to functions within the system. Considering the dynamic flow characteristic of business processes, you might find that the person who processes orders is overwhelmed, or maybe the person who assigns stocks is overwhelmed, depending on the number of orders processed at a given moment or the orders delivered."

Figure 12. The Administration Cell "But if there is an integated system,"commented Susan,"manul transactions would be eliminated because an order might page_138 Page 139 be automatically checked against clients' credit, and stock assignment systems might be done on a first-in, first-out (FIFO) basis, for instance. This would automatically assign stocks and then debit the order from the client's current account, once the invoice is issued and sent electronically." "That is true, Susan. We might automate a process, but if we examine that process closely, we might still have steps where human beings take part. That is what we are talking about: the possibility of people turning into bottlenecks, obstructing other people's tasks," I added. How the Cell Exchanges Information with Clients and Enterprise

Figure 13. Cell Information Exchange "That's true," said Robert. "As far as I know, it's virtually impossible to fully automate a process from beginning to end; even with orders received through an Electronic Data Entry (EDI) or via e-mail by clients, there will always be a person involved in the process. So far, there are no expert software models that take into account all the possible interactions

between a company and its suppliers or between a company and clients." "What do you mean, Robert?" asked Susan. "People should inevitably be a part of the process—or at least it is that way now—to assist clients in a personalized way; page_139 Page 140 to analyze if a debit note is acceptable for a client; to decide if it is necessary to change stock policies; to analyze if the sales estimates are correct; to ensure that if a client decides to cancel an order and places a new order, this can be handled in the factory; to deal with complaints related to the quality of a product; etc." "So," I commented, "even with a totally integrated system— one that might avoid loading data manually and that accelerates the operation—if there are people involved in the process (and especially if the people work in different departments), they become an indeterminate variable, a limitation to the system's speed. The reason for this is that an integrated system works on an entire process, while the person is limited to just one function." "So, what is the solution?" asked Susan. "The solution is to have people working on the entire process, not just one function. But that is more complex than introducing a computer system," I answered. "At the textile company I told you about, after the traditional steps connected with value-analysis and systems redesign were taken, the Administration and Commercial Department was divided into cells or mini-companies. Each cell dealt with the whole administrative and commercial process related to a group of specific clients, including the processing of an order, credit checks, assignment of stocks, accounting and receivables, and collecting. It even dealt with the sale itself. This way, people within the process could move dynamically in order to avoid bottlenecks, even though there was totally integrated software in place." "Does this mean that a member of an administrative cell might assist a client in a commercial aspect or that a seller might solve administrative problems?" asked Susan. "Exactly," I said, "but always respecting the basic functions assigned to each person. In this case, the assignment of functions is naturally done based on experience and skill, growth opportunity, preference, etc. It does not have to be fixed; on the contrary, the cells work much better when the team members fully cross-train each other." "And what were the results?" asked Susan. page_140 Page 141

How to Create a Corporate Sense in the Organization "Leaving aside the conventional aspects of productivity increase, which are usually a function of people having no free time because they are fully occupied working on other functions, there is a series of positive effects attributable to a true structural change into work cells based on processes. In the first place, time in the order-entry cycle is reduced drastically because there are no obstacles. A symbiotic relationship develops between the team in the work cell and their clients. Before, if a client filed a complaint due to a mistake in his account, he didn't know who to talk to within the Administration Department. With the new organizational structure, there is a true personalized client-service relationship: the client knows who works on her business transactions, who assists her, who is in charge of her account, and where her order is because all the steps in the process are within the cell. The most important effect is that with the new set of circumstances that emerge at the work cell level, the team members in the cell start to operate more like businesspeople or entrepreneurs. They have a more global vision of the business around the products they work with. "Little by little, all cells working dynamically with each other naturally and continuously improve the company's results. Since they now control the entire process, they figure out why sales are falling behind, why collection isn't better, etc., and start looking for ways to make their jobs easier and applying problem solving at the process level without the

traditional functional blinders. When this level of process maturity is reached, continuous improvement is inevitable." "Does this mean that workers are no longer individually evaluated and that only teams are evaluated based on business results?" asked Susan. "Exactly," I said, "evaluated not rewarded . I reward my dog with a biscuit for jumping through a hoop. People are different; a manager evaluates their work and their performance, not the person, and provides the feedback that is necessary for self-correction or self-development. Adults have free-will and can make their own choices, assume responsibility for the choices they make, and be accountable for their actions. People actually like this kind of page_141 Page 142 treatment and go on to treat others the same way. But somehow we forget this in business and think we can tell people what to do. If they do it, we give them an incentive reward. On the other hand, people also like to compete, and that is healthy as long as the competition is not with each other but rather to improve themselves, such as to reach a new record. Using a sports analogy for business, competition should be more like that of swim teams where each swimmer works hard to surpass their own records within their own area of expertise. In doing so, the entire team benefits, unlike in sports such as boxing. "But when it comes to office environments in the Administration and Commercial Departments, we need to factor in the same considerations I mentioned to Arthur the other day about giving merit awards to outstanding factory cells. As each of the teams into which your departments are divided enters their continuous improvement cycle, setting quantitative objectives within their cells and then giving merit awards to individual performers would be detrimental to this continuous improvement cycle and generate negative feelings and emotions within that team. That's why the best thing to do is to implement a mixed approach: First, recognize outstanding teams for the entire production of the cell. That's a straightforward measure of units produced against standard production targets. Even in the office environment, there is always some output that can be measured. Second, recognize individual positive attitudes—not just within the teams that achieved record levels in productivity, but looking at all the individuals across the board so that you reinforce positive behaviors that enabled others to succeed: cooperation, collegiality, teamwork, job skills, leadership, etc.," I explained. "What you are saying then," said Susan, "is that incentives and rewards reinforce the wrong behaviors for a PBO culture instead, we should recognize good performance at both the team and the individual levels with merit awards. I get it … but let me ask: Who decides? And what's the criterion for giving out merit awards?" "That depends again on the company's culture," I replied. "The best implementation of a company-wide award system I've seen included monthly awards and year-end awards that were page_142 Page 143 monetary and non-monetary (time-off with pay, prizes, etc.). The criteria for both team and individual awards was carefully spelled out for everyone to see and understand; what's more, because the individual award system was available to all employees regardless of area, position, or management status, people were able to nominate each other for individual awards, including their supervisors and managers. And vice versa, of course." Susan was very interested in the possibilities of an award system for the entire company that would reinforce desired positive behaviors across all levels and departments. She immediately grasped the possibility of altering a corporate culture for the best— one where people would feel comfortable giving and receiving constructive feedback and criticism from others. She mentioned again that I should involve Klaus, and repeated her desire to participate with us in designing an award system. I agreed and moved on with the meeting. "Robert, you had a question a minute ago.…" "Yes, thanks. What was the lead-time reduction in that company you spoke of earlier?" asked

Robert. "It was the combination of setup time reduction and the implementation of a Kanban of finished goods that ensured 100-percent client satisfaction, along with the formation of administration and commercial cells. All of this together reduced delivery time to five days," I answered. "This paved the way for cells to engage in continuous improvement cycles. Clients' lead times were measured and controlled daily, and in case of surprises such as a production lead time of more than ten days, the reason was known immediately and corrected. This would have been impossible to detect before the implementation of cells and PBO." Disintermediation "I believe lead time compression in a company, apart from being a competitive weapon against imports and an engine of continuous improvement, will enable us to evaluate distribution policies," commented Robert. "How do you envision that?" Susan asked Robert. page_143 Page 144 "I mean that if a company makes a structural change aimed at quick delivery, as in the case of that textile company, many opportunities for the improvement of distribution policies will jump out. For example, in the case of that same textile company, I see two: First, assuming that this company deals with both direct clients and distributors, they have the opportunity of delivering stock to distributors every five days. Distributors don't need as much stock to fulfill their clients' needs. If the company used to deliver goods to distributors every 30 days and now this takes only five days, the distributor can offer the same standard of service with a fraction (one sixth) of the previous stock. This can result in two things: either the company can renegotiate the price of products since it avoids distributor's costs related to personnel, or it can maintain prices but offer lower prices to consumers. In addition to this," continued Robert, now really buying into the concept, "if the company is capable of delivering in five days, they must consider their use of distributors in the first place. They can distribute goods directly to consumers, can't they?" "Yes, but you should think about a new logistics network for deliveries, because you will receive frequent and small orders from all around the country," I interrupted. "Sure," commented Robert. "We might also propose a mixed strategy: maintain part of our distributors and increase direct consumers. But I believe something like this will affect our commercial policies due to the new opportunities that will come across—not a bad problem to have, really." Business to Consumer (B to C): Speed First "Moreover," continued Robert, "if we think about our company, I believe the tools we could apply, both at the factory and at the Administration and Commercial Departments, would give us a certain degree of 'speed.' This could represent a formidable strategic tool, not only in our current competitive situation, but also considering the immediate future, with general access to the Internet by consumers." "What you are thinking, Robert, is that your competitors are not ready to face this situation," I added. page_144 Page 145 "Exactly, John. A competitive advantage should be a unique and unattainable aspect for our competitors. And the transformation we are considering for the factory and offices, which by the way is not a minor change, cannot be duplicated by our competitors, considering that it is a well-known fact that the weakest point of many dot.com companies is that they cannot react quickly to market demands, and their logistics flexibility. In the case of a traditional company such as ours with a 'B to C' structure where all consumers of spare parts contact our distributors, speed is essential." "Sure," commented Susan. "Imagine that if they can contact us by just clicking on the screen of one of our spare parts distributors, they won't be pleased if they have to wait for days until they receive the parts they ordered. Distributors should offer not only quick deliveries,

but also a wide variety of articles in order to deliver what the clients need and when they are needed." "That is why the change we are proposing to implement in the company through this Phoenix initiative is so important," I commented. "The ideal thing to do is to avoid overstocks at both the distributors (our subsidiaries) and at the warehouse of finished goods. We know that in our market, high quantities of stock do not ensure good service, but variety does. That is why it is essential that orders for distributors be processed speedily in the Administration Department and that they are delivered as quickly as possible from the factory. Implementing manufacturing mechanisms will enable us to quickly replenish the stock of finished goods in our warehouse. The fundamental tools for speed involve production cells, setup reduction, Kanban and finite programming at the factory, and fast administrative-commercial processes supported by cells," I replied. CRM, Call Centers: How to Profit from Them "Why didn't you include among those tools a call center or CRM (Customer Relationship Management) software?" asked Susan. "Susan, I will cite a practical case to answer your question. Some years ago, I was in charge of a process-based organization page_145 Page 146 project in a major telecommunications company that offered services mainly to other companies. They had a call center that they were very proud of since they had been pioneers in this type of process. However, the clients' level of satisfaction with their response time to quick questions and complaint reports was low." "What was the problem?" asked Robert. "The problems were the questions that exceeded the knowledge of the call center operator. Difficult questions were transferred to a person within the organization, and the client felt 'dragged' around the entire company," I answered. "Do you refer to situations in which the client had doubts about his account, complaints about service interruptions, or questions about the date of service activation?" asked Robert. "All of the above," I replied. "When the questions exceeded the knowledge of a call center operator or when the answer was not available at the computer system, the client's question was transferred to a different department within the organization: Administration, Engineering, Operations, etc. But what usually happened was that the answer (even when dealing with an expert in engineering, for example) was not immediate because the expert needed to get acquainted with their problem. So the client, even when there was a call center, felt that the company's response to his claim took longer than expected. And I am not referring to the lack of personalized relationship with the client; the client was assisted by any call center operator who was free at the time of the call." "But couldn't the new CRM systems, with their complete clients' records and their administrative and technical situations, have helped dealing with those problems?" asked Susan. "Yes, but they were useful just as long as the intervention of a specialist was not needed to handle the claim, request, or complaint. The problem, even with a CRM, would remain the same. When the client's claim was necessarily transferred to someone with more knowledge (at the Administration, Engineering, or Logistics Departments), the client's question went through different 'turfs,' and the answers took much longer. And imagine what happened when a question bounced between two of these territorial turfs, such as the Administration and Commercial page_146 Page 147 Departments as in the case of a complaint on mistakes in a debit note."Both Susan and Robert looked at each other and recognized immediately the typical problem I was describing. "And what is the answer to this problem?" asked Robert. "The answer is to prioritize the steps to be followed," I answered. "First create a process-

based organization with different cells, and then incorporate the technological resources we are talking about in each cell." "And what happened at the telecommunications company? How were the cells formed?" asked Susan. "At first, they included a representative of each cell in the old call center. The cells were formed with the idea of incorporating in each of them all functions related to clients: sales, client assistance, activation, administrative follow-up, collection, and technical support. Therefore, any claim that exceeded the knowledge of the call center was answered in a much more personalized and quick way by the cell dealing with that client. In addition to this, the client's information included in a CRM system became more effective. That information was normally used only by the people within the company who were directly in contact with clients (Sales, Administration), but at the process-based organization, it was shared by the rest of the cells' members. In that way, in the unique cell-client relationship, all the cells' members at Administration, Engineering, and Logistics not only answered quicker than the traditional organization did, but at the same time had constant feedback from a specific group of clients. This enabled direct learning by the cell about clients." "But if a traditional organization accessed the information on clients in a CRM system, wouldn't it be possible to offer personalized answers to clients?" asked Susan. "No, because we would face the problem of a fragmented organization," commented Robert. "Consider this scenario, Susan, in any of your departments, such as Credits: Even when a person has access to a client's record in the system, he will never have a personal relationship and a global vision of their business before the call arrives. But he will if he deals with the same group of specific clients within his cell. The same thing is true with any other activity related to clients." page_147 Page 148 Susan responded, "All we are talking about is basically creating a process-based organization. But is this possible in service-oriented businesses?" Process-Based Organization in ServiceOriented Businesses "Yes, it is exactly the same, Susan," I answered. "At any service-oriented business (banks, insurance companies, general distributors, telephone companies), you find processes: key processes and support processes. Once a traditional reengineering has taken place (value analysis, computer and information systems integration analysis, etc.), a process-based organization can be implemented. Even at a bank or an insurance company, you will be surprised to see how some key processes that used to take days or weeks in the past are carried out in hours or minutes. The key is to redesign the processes so that they become repeatable and measurable." " "In some service-oriented businesses such as banks or insurance companies, there seem to be standardized processes, and one could easily build cells around them. But what happens in the case of high technology businesses?" asked Robert. "Is it possible to form cells where processes are not standardized?" "With very few exceptions, Robert, all types of organizations are good candidates for PBO. For instance, a small advertising firm and a small consulting company are good candidates since they already operate naturally as a cell (the default organizational structure for a small group that does not exceed the 'social limit' determined by the team's emotional distance). Even in a creative organization like an advertising firm, if they are large enough to have several functional departments, there is a high probability that there are inefficiencies that can easily be addressed with a PBO structure. Robert, the concept of basing an organization on processes is an irreversible movement in every industry; it is just a matter of common sense. "Let's consider the case of a process-based organization in a high technology communications business. The company was and is still the market leader in telecommunications, in the area of information transmission services. The company was

created some

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Page 149 years ago based on the vision of a group of people who detected unmet future needs. Based on this entrepreneurship, they made the company grow far more than their competitors. With the passing of time, the company's explosive growth posed problems that did not exist before, during a period characterized by their personalized service to clients. Like a walrus chased by killer whales, the company was struggling for the survival of its market share, even though it was still the market leader at the time. Its strategic objective was, at that moment, to go back to basics. They aimed to recover the personalized service to clients, speed, and efficiency the company used to have when it was smaller. "To reach this goal, they decided to implement a structural change to recreate the organization based on key processes; this led them to the creation of 20 cells, each one in charge of a specific group of clients. The company had an important cultural handicap: Most of the staff were engineers and other open-minded young professionals, but the company's president and initial founder of the business continued transmitting the passion that all entrepreneurs have. From the beginning, the effort to improve communication was important. More than a third of the company took part in workshops in which they cleaned up their processes. The definition of working cells around processes was largely designed with input from a large portion of the staff. The vision of a future computer system, with all of its functional characteristics, was also shared by the entire company." "Did they take advantage of this change intended to aim at a more integrated system?" asked Susan. "In fact they set two stages," I answered, "based on conceptual definitions. They knew that the implementation of any integrated system in the company as a whole would take at ast six months. And the implementation of any new system required a mental adaptation effort for the team. But they didn't want to postpone the implementation of a cellular concept—that is, the true basis of the change that would also allow them to obtain competitive advantages. They then considered that it was preferable to 'patch' their current computer system and implement the cellular concept immediately, instead of waiting six months for a fully integrated system and face a double challenge of adjusting to the system and page_149 Page 150 adaptation to the cellular concept. While working within a cell, people would have a more realistic vision of their future and the computer/information needs for this type of organization." "How long did the project take?" Susan asked. "They started with value analysis, development of new procedures and operating practices, definition of cells, and determination of short- and medium-term computer systems needs. The whole effort took about nine months. Then came the Big Bang." "What's the Big Bang?" asked Robert. "Simultaneous with the project, they were building a high-rise office building where they decided to physically centralize several functions previously located in different geographical areas. A month before, a pilot cell had been implemented to test the new working procedures and the 'software patch' on the computer systems. A month before that, they had started training the staff who would work within the cells. Some people would be assigned new functions immediately and were slated for on-the-job training. The persons who knew the task well trained their partners, shoring up weak points. Installing the computer network cable in the new building had become one of the most critical issues, but they expected to finish in time for D-day. The layout of each cell (about 20) had been designed by the business manager of each cell and the staff. They also standardized the new facility area, desks, and chairs during the change. The idea was to be fully operational on a Monday, moving documents, computers, and office furniture during the weekend. The previous Thursday and Friday, people packed their documents, folders, and diskettes in boxes that were labeled with the number of the cell, and their position within the cell and

within the new building. During the weekend, the computer network was connected and tested by the Systems Department. On Monday, people started working in a completely new organization. The nine months of cultural preparation, process definitions, and systems analysis were put into practice from day one." "Is it common to have a Big Bang like that?" asked Robert. "Again, it depends on the corporate culture," I replied, "and not on technical risks or centralizing systems, procedures, and policies. In other organizations, we had to follow a much slower page_150 Page 151 transition plan while the organization grew accustomed to the idea. Cells were implemented sequentially, not all at the same time like in this case." "How were business managers selected for each cell?" asked Susan. "Selecting the business managers of each cell was one of the most complex things about the human side of the change process. From the first months of the project, the most businesssavvy people in the organization could foresee what important changes would affect the organization chart. Remember that in this company, there was a general manager and cell managers below him (no department managers). The only department managers that remained were from Human Resources, Systems, and Marketing. But the idea was to orient them toward the clients as well, at a second stage. In addition to this, the processes and organization redesign was useful to evaluate the flexibility and leadership of key people within the organization. The final decision on who would be the business managers was made by the general manager, weighting their people-skills more than their technical competence." "And did you agree with that priority, John?" asked Susan. "Absolutely," I replied. "Technical abilities can be easily acquired or can be delegated using common sense. What was inadmissible was to put someone in a leadership position when that person was not a leader or lacked the potential to become one. Remember that one of the most important objectives of cellular organizations, apart from the strictly pragmatic aspects, is to build a continuous improvement culture permanently within a team. They also offered leadership development to the staff to encourage these qualities. A leader can be created. It is possible to teach this to a person only if there are some good human qualities below the surface." "What do you think is the most important quality of a leader?" asked Robert. I answered, "In my opinion, it is generosity: Generosity in ideas and actions; generosity in sharing knowledge and helping others; generosity in defending injustices, in appreciating staff's success, and in giving praise. It implies being sensitive about others in a balanced way." page_151 Page 152 "And in that organization, John, when the company turned into a process-based organization, did traditional management disappear?" "That's right, Robert. For example, the commercial and engineering management disappeared because these functions were absorbed by cells. The same happened to some other top positions." "And what happened to those managers?" asked Susan. "The company was frank with them from the beginning," I replied, "even when the future organizational charts were not known, they knew they'd be included. These managers had years of training and experience in the company, and they had the respect of their employees and carried the organizational memory in their 'collective head.' Some more than others, of course, but still a considerable intellectual capital. The same message was directed to all area workers where core business process areas were likely to be 'cellularized,'? such as the commercial and operation departments. The managers of such departments would likely become business managers of one of the future cells." Both Robert and Susan were now intensely focused on what concerned them most about change: their current jobs. I

needed to have their hearts and minds with me on the Phoenix team. This was a crucial moment for them and for me. Now more than any other time during this project, being 100 percent open with them was the only way to earn their trust and the only way I knew how to be. Robert pressed on. "John, what happened with other top positions?" asked Robert. "Something similar to what happened with the managers," I answered. "Some were in charge of functions that were absorbed by cells and others became members of different work cells." "But there weren't any other senior management positions within the cells or anywhere else, were there?" asked Robert. "No, there weren't," I answered. "For example, the former engineering manager became a member of a cell and was in charge of one of the function sets covered by all cells: supporting the satellite network for all clients. The 'network engineering' function was included within the cell structure and reported to one cell. However, such intellectual wealth was scarce and had to be spread among all others." page_152 Page 153 "As you said, John, the manager became a member of a cell and lost his former position. Isn't that right?" commented Susan. "If you look at it that way, then yes. But remember that although the traditional 'position' reorganized into the cellular structure, the process that it represented was still needed and the person was still there. But I understand what you are trying to say, Susan. In a cellular organization, like in a soccer team, a player cannot be the 'boss' of another player except if he is the captain of the team (and that title itself has a different connotation than 'boss'). However, there are players in the team who are respected by others for their abilities, experience, performance, and generosity. The respect grows even more if the experienced player teaches others how to be as successful as he or she is. And it is common that within a soccer team, there are players who earn more than others, even more than the captain. And this is accepted as something natural within the team." "What you are saying then, John, is that in these situations, every person is respected and placed hierarchically on the basis of his or her competencies . Is that right?" asked Robert. "Yes, that's exactly right. But that doesn't mean that all managers accepted the idea right away, even though their salaries, in this case, remained unchanged," I added. "In an organization that undergoes this type of change, it is important that business managers in each cell talk to their team members who were managers before, not just to show respect for their knowledge, but to support each other during a period of transformative learning for both; and the rest of the team members in the work cell should be aware of this. But as we said earlier, it is ultimately a personal choice that the former manager needs to make. "I remember the case of another company that implemented a similar change. When a business manager assumed his new role in front of the cell members and the company's president, he specifically referred to a former manager who was becoming part of the cell. He singled out that person and showed publicly his appreciation for the knowledge and experience he brought to the team. Previously, they had discussed the new philosophy and agreed to support each other during that period. However, the field of page_153 Page 154

micro-sociology or human relations in organizations is not an exact science (some may disagree with me on this one). There might be former managers who, when incorporated into a cell, offer passive resistance to the new organizational culture, even though they are not economically affected. This might be related to a previous management style. If the manager has been open and generous with others and sensitive to the environment, the transition will not be so hard for that person. An authoritative or arrogant management style will imply a stronger transformation effort for

that person." Robert, who was following my every word, suddenly interjected. "But you are better off getting rid of that type of person, right John?" "Not necessarily," I replied emphatically. "Going back to my prior argument for human free will and choices, the business manager for the cell and the former manager, who is now a team member, will ultimately decide what is best for them and for the company. However, 'getting rid' of someone, as you put it, could be an easy way out from taking a more responsible, caring approach. I think that the makings of a true leader emerge when a cell manager, faced with that situation, not only understands the position in which the former manager finds him- or herself, but can feel the compassionate courage and the generosity of spirit to help another human being." I stopped talking; I had struck a nerve with Robert and Susan—no more posturing, no more pretenses, no more veiled questions. I finally cut the silence to avoid emotional contagion. "Susan, you had asked me earlier about the other support functions…" "Oh, yes," she replied. "What happened to the supply function in that company?" asked Susan. "The supply and replenishing responsibility was incorporated within the cells, but not the administrative aspects of it. This approach worked well; I've also seen it used in Human Resource divisions, for example, where accounts teams have the responsibility for recruiting, compensation, talent development, and training for the client areas they support, but not for their administrative aspects." page_154 Page 155

The Measure of Success for Business Managers "As I shared with you before, what these companies were trying to achieve was to return back to the basics that made them successful in the first place: improvement not only in areas of client services, but also with respect to business management and financial controls. That is why it was essential that business managers had ample access to information related to business, income, and costs, and the impact of their cell. If that was not the case, what kind of motivation would they have to increase the productivity of their cells? They needed an indicator of success or failure tied to overall company performance. One of the most important aspects related to cells' costs, for example, was the high cost of equipment and the outsourcing of the installation of this equipment." "But if any business manager at a cell purchased equipment from the suppliers directly, wouldn't they lose the benefits of economies of scale or negotiating clout in their purchases?" asked Susan. "Yes, they would," I answered, "and they would also lose the standardization of equipment (and of suppliers) important for a future upgrade of the satellite network. That's why the selection of appropriate suppliers (or preferred providers, as they called them) was made by a centralized staff in charge of negotiating master contracts against which the cells could acquire equipment. But the business manager was responsible for asking what was necessary for the installation of the satellite network, and for stock control of critical components related to his cell." "But if each business manager prepared a stock of critical components, this increased the company's levels of stock," argued Susan, "because you know having different people define their own stocks, according to a decentralized philosophy, results in an increase in the total cost of in-process stock." "That's right, Susan,"I replied. "So in order to avoid that and to maintain the independent business sense of the cells, they decided to allow the business managers to establish their own optimal stock level, but not carry their physical inventory. Instead, if a product X was purchased by all the cells, the total stock of this page_155 Page 156 product was located in the same physical place, and managed through a computer information system."

"Okay, but that's related only to the operative aspect of the purchase," pointed out Susan. "Who was responsible for the preparation of the purchase order and for its processing, leadtimes activation, etc.?" she asked. "Suppliers for most standardized products were defined at a meeting with all the business managers. The administrative follow-up of each order was the responsibility of the Supplies Department that had remained centralized for the entire company and offered services to the cells." "Apart from profits, were business managers controlled in other ways?" asked Robert. "Yes, by their clients' satisfaction indicators and the increase in sales," I replied, "much like a regular business." "And what about each cell's profit objective? How was this evaluated?" asked Susan. "They considered the revenue from invoices paid by the cell's clients, the cell's own operating costs, and the costs charged back from other departments that had remained centralized, such as Supplies and the Human Resources (HR) Department, for example. By the way, HR was a prime candidate for adopting cellular concepts and process-based organization, and most companies did that at a later time." ABC (Activity-Based Costing) and the Process-Based Organization "Going back to Susan's question about the profitability of the cells, this is a very important aspect. If the percentage of overheads assigned to each cell was too large, the costs charged back from other departments over which the business manager had no control (Legal, Human Resources, or Information Systems Department) directly impacted the cell's profitability." "But overhead costs must be charged back to cells. Otherwise, who would pay for them?" commented Susan. "You are right, Susan. But how should overhead costs be charged back? Some years ago, we implemented cells in the page_156 Page 157 Administration-Commercial Department of an industrial company. The business manager of one of the cells was really upset because the Legal Department (a function that had not been included within the cells) was charging back to cells according to the percentage of each cell's sales and not according to the work actually requested by the cells. The increase in sales of this business manager's cell had been significant, so Legal was making a hefty profit when apparently the cell had not requested any work from the Legal Department. Or did they?" "I think," said Susan, "that to evaluate the actual costs, the solution for this is the implementation of an ABC (Activity-Based Costing) system within the cell." "Exactly," I replied. "And when deciding to adopt an ABC system, it is important to consider that the cellular structure simplifies the implementation of ABC enormously." "How is that?" asked Susan. "Generally, the cell is already integrating within its process several functions that were separated before, such as supply, collection and administration, engineering, or sales administration. Before implementing cells, when evaluating the cost of a product, each department charged their expenses to this cost on the basis of old pro-rata formulas that did not reflect reality (only a percentage of direct labor costs was absorbed by the product and the same percentage was applied to cover the overhead of supporting departments). "Currently, several commercial-administrative functions, which used to be overheads, are included within an office-cell. Everyone knows exactly which clients and which products the cell deals with, so it is possible to accurately calculate the cost of the specific activities related to these products and clients. At a factory with a cellular structure, we find the same: industrial processes are grouped together, and all indirect tasks, which were considered overheads (such as the focalized in-cell storage operation, equipment maintenance, and quality control), are performed by each cell. This allows the business manager to know the exact cost of a product, due to the univocal relationship created between products and cells.

As a result, there are only a few activities that are still considered overheads. These are related mostly to departments that have not been turned into cells, although they have transferred part of their former functions to them page_157 Page 158 or become a separate unit, as was the case of the Central Production Programming Department. With the implementation of a Kanban and cells, the factory does not need these overseeing and activating functions any more. That is how the evaluation of a product cost and its pricing are simplified, since most tasks included within the cells and the cost of each of them (resources, etc.) are now known. "Anyway, it is important to bear such remaining costs—the costs that are not included within the cellular structure, such as the Legal services we were talking about earlier. These costs were prorated before because there was no direct relationship between Legal and the company's products, with the exception of a few cases. With a cellular structure, the services of such departments are requested by each business manager according to the needs of the cell, and since the cell deals with perfectly identified clients and products, each service provided by Legal is computed as part of the operating cost of that cell under an ABC system." "Did any of them implement internal invoicing mechanisms between cells and centralized departments in order to make costs calculation even more accurate?" asked Robert. "Some companies have tried this because it gives the centralized departments a sense of higher competitiveness. But departments sometimes incur excessive costs, too, and some business managers threatened to go outside for more cost-competitive services (which they were allowed to do), creating internal problems with Purchasing and Accounting. Therefore, they dropped this practice and all the complications that came with it. Can you imagine if that Legal Department I was telling you about earlier—the one that charged so much—went out of business in its own company? You get my point." "Why not put those lawyers out of business?" commented Robert half seriously. "They probably deserve it, too!" laughed Susan. I opened myself up for it. "Well, that's why it's very important to develop cell synchronization mechanisms," I said to both of them. Cell Synchronization "One of the problems that we face when creating a cell-based organization is that the general manager, chief operating officer, page_158 Page 159 and every chief executive is left with a second tier of top managers composed of cell business managers and those of the remaining centralized departments. Their titles vary widely with each organization, ranging anywhere from managers, to senior managers, to vicepresidents, depending on the size and hierarchical layer. There seems to be a cloud below the chief executive, and it is difficult to think that he/she can lead them in traditional hierarchical ways. Consider the case of the telecommunications service company I was talking about: They created 20 cells with their respective business managers, all under the control of one general manager—a much flatter layer of management." "How does the general manager direct the activities of the company, in that case?" asked Robert. "That is just the point. There would not be enough time to direct so many people in a traditional way." "So how did they do it in the company you talked about?" asked Susan. "The basic idea," I replied, "was to apply the same mechanisms at work within the cells, which offered autonomy to the staff. In the case of the management group, the business manager group operated as if they were a cell. If you observe an office-cell in action, for example, you will notice that people do not go to their business managers for directions on how to perform their tasks or to get help with their partners. There are mechanisms that allow them to move independently within their areas, and they only ask him or her for help

on strategic or human resource aspects. Similarly, these companies developed synchronization mechanisms among the business managers, which allowed them to make business decisions among themselves without always consulting the chief executive. In other words, decision-making power is delegated to the people responsible for their execution." "Which specific areas were these synchronization mechanisms aimed at?" asked Susan. "There are basically two: internal and external areas. For example, among the internal subjects that needed coordination between business managers were the ones related to computer page_159 Page 160 and information systems, which had remained as a centralized department in that case. All important functional modifications or acquisition of new software were discussed in a meeting held by the business managers and the systems manager. A final agreement within the group was important because all cells have standard rules and procedures regarding systems, and consistency between cells was highly respected." "What if the budget for the purchase of software was too high? Was the expenditure authorized at this meeting?" asked Susan. "Yes, but it depended on the amount. It was authorized only when it was the budget assigned by each business manager for this type of investment," I answered. "In case the amount exceeded the budget assigned for the cells, the group still decided on the systems functions and requirements, but the economic decision was then made by the general manager." "And what happened with external subjects? How did they proceed?" asked Robert. "An example of this was the outsourcing decision to contract with third-party suppliers for the maintenance of their clients' satellite equipment. The same supplier then operated in different geographical areas of the country and worked with many different cells. In order to profit from economies of scale, once a supplier was selected, the negotiation included all the services available from that company; they got our business and we got a substantial price break. Therefore, decisions regarding selection, contracting, and dismissal if necessary (due to noncompliance) were made at the business managers' meeting." "I suppose that," commented Robert, "at these synchronization meetings, some of them emerged as leaders over the others." "Sure," I replied, "some had much more outgoing personalities than others and managed to influence the rest in making decisions. There were others who had better technical backgrounds (the company was technology-related), and their recommendations on technological subjects were respected." "What were people's growth and development perspectives in these cellular organizations?" asked Robert. page_160 Page 161

Personal and Professional Development in the Process-Based Organization "Advancement in cellular organizations is handled a lot differently than in more traditional organizations, and it is essential to make this known to people. To answer your question, let's follow the path of a person who enters a cell. First she/he receives cross-training in other areas of the process that the cell is responsible for. Based on performance, merit, and adjustments, the base salary increases, then grows in relation to the person's experience and personal developments. There comes the time when this person is experienced enough to become the business manager of the cell or another cell or a manager of a centralized department. Beyond that, the person can become the executive director of the company. Obviously with a flat organization, moving up on the organization charts is limited by a smaller number of available positions. But this does not mean that the person can't grow and

advance. Some companies have elaborate programs to encourage lateral moves for workers and managers, or temporary job rotations that give more skills and experience, making an individual more valuable to the organization. Compensation naturally follows, when the added skills, knowledge, and abilities are translated into tangible results for the organization." "What are the factors that are taken into account for management promotions?" asked Robert. "There are two types: human or sociological factors and technical factors," I replied. "These factors have a close relationship with pre-defined abilities. In my opinion, human factors are just as important as the technical. For example, a business manager position requires candidates to know the technical area, but also to have demonstrated the ability to recognize the value of people of diverse backgrounds and with different types of intelligence and personalities (including all the elements of diversity); to appreciate the whole person; to help people discover their best qualities and those that can be improved; and lastly, to be able to create an environment of continuous improvement and positive team emotion." "Sounds like a tall order. How were incentives and merit awards structured for people within office-cells?" asked Robert. page_161 Page 162

Figure 14. Evolution in the Cellular Organization "The structure varied for each organization," I replied. "Some are awarded on the basis of each person's salary, which can vary within a cell according to a number of factors, but mainly performance; others look at the individual's experience in combination with performance (although this criteria works against the highly productive newcomers). Others still structure them solely on the basis of group performance, but this approach sometimes works against those who perform at higher individual levels and suffers from not being singled out. Sales volume, for example, is an objective that can be connected fully to the performance of the entire cell and should be rewarded as a group." "Why?" asked Robert. "Isn't it always logical?" "Well, yes, it is logical to relate a variable incentive to a team's objective if you want everyone on the team to push in the same direction in pursuit of a common goal. But on the other hand, there might be people within the cell who feel they are working more than others and might feel that this team evaluation is not fair, and in the end, they will not be motivated at all." "Then what is the solution?" asked Robert.

"As I was saying, Robert, incentives are a delicate matter, and they depend on the company, the culture, and its leadership. But a possible solution is to separate in variable amounts what each person within the cell receives. One part of it could be related to economic performance and customer service provided by the cell, page_162 Page 163 and the other part could be related to the individuals' performance, attitudes, and behaviors. For example, when recognizing an individual performance, it is important to consider some of the personal characteristics applied—such as being generous with her time for others, sharing information, or 'going the extra mile' to help a co-worker in need—to attain that level of achievement." "Okay, I get the picture," said Robert. "But considering the work done in cells and the centralized areas within this new structure, if the business managers decide on business priorities and manage the process as a whole, tell me then, what's left for the chief executive of the company to do?" Robert's question could be a complex one on many levels. I paused for a second to sort out my thoughts before answering, because Martin had asked me the same question the day before. I had some ideas on how to address this with him in the context of this particular organization, its culture, and Martin's natural hands-on leadership tendencies. But this question could also be answered for this particular company within the political, social, and economic climate in which it operates. However, I was not ready to give that away, yet, and Robert's question was simple to answer. The Function of the Chief Executive in a Cellular Structure "The simple answer, as I see it, is that this is a tremendous change for a chief executive to endure," I replied. "It is a different job, and one that requires a strategic insight that goes beyond the nuts and bolts of operating the business. A business is like a micro-organism in a complex ecosystem; the external ecosystem moves, flows, turns, and changes in unpredictable ways. The process-based organization philosophy we've been discussing here gives the CEO the flexibility and speed to adjust to the whims of the ecosystem and to survive and grow. That takes time for thinking and reflecting, a luxury that many chief executives don't have. While the business managers and directors are busy getting results inside the company, the CEO needs to spend more time shaping and communicating his or her vision for the company and the direction for everyone else to follow by looking outside the company. page_163 Page 164 "In short, Robert, the chief executive now has to deal with more people and become less involved with the day-to-day tactical business. The daily decisions are now made by the business managers and others below him or her, freeing more time for the strategic decisions." "Can you give us a practical example?" asked Susan. "Yes. At the service-oriented business I was talking about earlier, the chief executive was mainly in charge of fundamental strategic aspects of the business, but in some instances, he had to decide on tactical aspects, as well. For example, he had the final decision on the implementation of a new product or service to be provided that would result in the development of a new market. He had the final decision on the total company's debt levels, loan acquisition, and investments. In addition to this, the chief executive was in charge of controlling each manager's budgets with regard to income and expenses and analyzing deviations with the help of his financial officers. He also acted as arbiter or judge on internal issues such as when it wasn't clear which cells served what clients or if new cells had to be created to serve an industry or new geographical area. He also controlled general HR policies regarding executive hiring, compensation, succession planning, training, incentive strategies, and future talent acquisitions. On the external side, he oversaw government and institutional

relationships, industry regulators, company-client relationships, and community out-reach programs." "What you just mentioned is very interesting, John. The expansion of organizational activities and new services under a process-based organization/cellular organization are internalized now in a different way," commented Robert. Orderly Expansion in the Cellular Organization "That is correct, Robert. The expansion of the organization is totally different. At the company I was telling you about, a conventional expansion in products and services would have meant recruiting more people for the Commercial, Sales, Engineering, and Administration Departments. But this would have been counterproductive: the functional 'islands' or 'silos' within the company would have grown, page_164 Page 165 but productivity would have decreased; response time to clients' requests for the performance of tasks and services would have taken longer; and there would have probably been more information reprocessed due to human error. At a cellular structure, growth is amoeban . Amoebas divide, and when a business grows, you need two cells instead of one to manage it. And if a new product or service has to be offered, it is not strategically convenient to add it to an existing cell, but to create a new cell for that specific purpose." "Why isn't it convenient to assign a new service or product to existing cells?" asked Robert. "Is it because of the law of diminishing returns?" "Yes, that's part of it, but also because the members of that cell might not display great effort and the necessary passion for the development of such a service or product and might consider it a marginal benefit. That's why it is advisable to create a brand new cell to be in charge of this service or product and to launch this new business with a sense of entrepreneurship." "Could a cell be formed by only one person?" asked Susan. "That is a possibility," I replied. "At the beginning, a person might be in charge of the whole process related to that service, but as the sales increase, the company will need to recruit more people for that cell, until it reaches the point of diminishing returns that Robert mentioned a minute ago." "Another question, John," prompted Susan. "How is this trend of process-based organizations, in which a team works closely on a particular process in a cellular structure with tightly coupled dependencies, compatible with another modern trend: teleworking? If someone works from home or away from the rest of the team, isn't this like taking out a link from a chain? What happens then?" "That's an excellent question Susan, because it goes to the heart of what work cells are all about," I commented. Teleworking and Work Cells "In a way, it does affect the cell," I answered, "because we would be breaking apart a strong chain if the link or person in charge of collections, for example, worked from home. On the other hand, page_165 Page 166 considering teleworking in isolation, there are of course benefits for employees (convenience) and for the company (less overhead— electricity, space, rent, etc.). But in a cell, physical proximity is important for a couple of reasons: First, people need to see one another to sense when one of them is overwhelmed and needs help, to learn from each other, and to share current information; and second, working on a team stimulates continuous improvement on the basis of permanent interaction of ideas." "Is there any reason for this incompatibility?" asked Susan. "Are there cell staff members

who work at home?" "Yes, there are, and some cases work better than others. For teleworking to be a win-win situation for both the employee and the company, it is critical that the teleworker perform as many tasks as possible linked to one sub-process within the process. This would lessen the weakening impact on the work cell (or chain). The objection to the first factor would then disappear. It is like having a one-person cell in charge of a certain type of clients. This person then processes all transactions within the process through a computer network connected to the company's server. Any necessary authorizations are sent to and received from the company electronically. Some insurance companies have adopted this one-person cellular structure quite successfully to claims processing: When natural disasters like floods or hurricanes hit and there is a surge of claims that need processing fast over a finite period of maybe one or two months after the natural disaster, a teleworker can help handle the overflow." "And how is the objection to the second factor solved with regard to team work for continuous improvement?" asked Robert. "How do people maintain contact with each other?" Is video conferencing an option?" "Yes, but it would be impossible to eliminate all personal contact. People who work at home must meet with the rest of the cell team with a certain frequency to share ideas; to learn, reflect, and adapt as a team; and to reestablish psychological bonds. Empathy among people is something machines still cannot offer, but as I said earlier, some teleworking cells operate better than others. It is those cells that have developed strong team emotion that can act collectively regardless of physical location, distance, or continuity page_166 Page 167 of tasks. As a matter of fact, without strong team emotion, it is almost impossible to have successful teleworking in any organization, but especially difficult in process-based, cellular organizations for the reasons we just discussed." "I agree, John. That's been my experience as well, working with teams," commented Robert. "But aren't some teams, by nature, always dispersed like that? Take for instance the socalled 'management teams' like ours, where every member works independently of each other —sort of like telecommuting while still in our offices, if you get what I mean. Is exhibiting strong positive team emotion also a requirement for successful management groups?" asked Robert innocently. Of course he was on to something very significant that would come later in the Phoenix change project timetable, after all business managers are selected and assigned to cells: genuinely beginning to form a management team not just in words or in organization charts, but in reality . Robert was correct in saying that by nature, management team members worked separate, but not independent from each other—at least not the good ones who operate like a true cell, a management-cell, or better yet, a leadership-cell. While most companies address leadership development at an individual level or even as a "training thing,"there are very few —if any at all—that develop group-leadership qualities. The logical progression after workcells are implemented in a process-based organization is to develop management-cells that exhibit leadership qualities in all their deeds—in other words, a collective leadership act. So I answered. "Robert, the short answer to your question is yes: Exhibiting strong positive team emotion is an absolute requirement for successful management teams to exist. " "John, what are the next steps regarding the Phoenix project?" "Well, what we must do now," I said, "is to meet again to decide what resources from your areas we are going to assign to this project, and design a time line with deliverables and

milestones to be shared with the other directors next week," I replied. "Okay then, which specific areas in the Administration and Commercial Departments should be involved at this stage of the project?" asked Susan. page_167 Page 168 "Look, Susan, we must first find creative ways to implement these concepts in these two departments, using the best tools and at the lowest possible cost in order to create value within the company. We just covered a number of examples here today; I can't tell you exactly which would work and which won't for your area, but I'd be happy to sit down with each of you individually or together to kick around ideas. Remember that to implement successfully fundamental changes in this organization, you have to simultaneously consider processes, systems, technology, and people. Therefore, all current users, computer systems, and Human Resources personnel must participate in the project, as well as the two of you without a doubt." page_168 Page 169 5 Designing the Logistics Department It was a restful weekend. After working hard during the week, I was finally able to enjoy some peaceful moments with my family. I have always tried to be consciously aware of their presence so that I can enjoy fully the spiritual uplifting effect they have on me. During my moments of reflection, I sometimes compare life in the current work environment with the work life that existed 50 years ago. There seemed to be a progressive but constant trend toward work standardization. Increased use of powerful computers by technocrats seems to severely restrict human creativity; the possibilities in human innovation appear to gradually be squeezed out of present work, despite the fact that innovation is the only hope for the survival of many businesses. That is the reason why I cherish my job—it allows me to think. Will it be possible to think creatively at work in another 50 years? As an eternal optimist, I believe that there will always be open fields for intellectual adventure, and that's why I am so ardently fond of the processbased organization strategy. Although it implies a significant technological infusion, it always keeps humans at center stage. It allows people to awaken their innovative muses, apply their powers of creativity to re-invent their jobs constantly, while rediscovering their passion. No one has offered me a position like that yet, so I continue working independently and promoting human dignity the only way I know how. I had already shared some PBO concepts about industrial issues with Arthur and business management ideas with Robert and Susan, but we haven't talked about the new ideas in the field of distribution and supply logistics. page_169 Page 170

World-Class Logistics Logistics is one of the areas showing the greatest advances in recent years. Applying the word logistics to business is relatively new, but paradoxically, already two classes of logistics could be distinguished: "push" logistics and "world-class" logistics. I had invited Susan, Arthur, and Robert to start exchanging ideas about this over a cup of coffee at the local caffeine joint. Susan could not make it because of an important deadline, but the other two drilled me with questions as I began to comment on some differences.

Figure 15. Kanban of the Logistical Network "First," I said, "let's look at push logistics . Obviously, it's a technique to move things. It moves the finished product from a plant or a general warehouse (if it is a service company) to different geographical locations—perhaps warehouses or branches in different places—with the purpose of satisfying the needs of customers at places away from the plant or the central warehouse." "To ensure customer supply, these warehouses or branches or distribution centers are usually used as a 'lung,' constantly responding to customer needs." "In some cases, these warehouses or distribution centers occupy large spaces, and they have a costly infrastructure such as shelves and material movement equipment that occasionally page_170 Page 171 involve sophisticated robotics systems for material searching and locating. Also associated with warehouses are direct and indirect labor costs, supervision, and inventory-control costs." "And, of course, they always include high fixed capital assets that besides their financial weight always include a percentage of obsolete items or items deteriorated by time." "But a distribution center," argued Robert, "has a very specific purpose: to serve our customers ." "Yes, of course. The ultimate purpose is always to serve customers. That is why we keep items in stock in the first place. But let's think for a minute why we do this," I continued. "First, as we discussed earlier, quantity of items does not necessarily equate with service to a customer. We might have a lot of materials stocked at the distribution center, and yet serve customers very poorly. Why? Because service has essentially to do with the variety in stock, and not with the quantities we carry of each article. We might have a warehouse with very few units of each article, and yet provide excellent service to the customers, because they evaluate service based on choice. This can happen only if the warehouse replacement is fluid and in synchrony with the variety of articles sold. "The second argument is that if we had a sufficiently fast company, we would not need warehouses or distribution centers to serve our customers. In an ideal world, we would produce on demand." "John, when you talk of a fast company, do you refer to lead time in the delivery cycle?" asked Arthur. "Exactly: Working to achieve a sufficiently fast company means working on every lead time in the cycle. It means reducing delivery times from the plant, forming cells, lowering setups,

and implementing a pull schedule system." "It also means reducing business management times in the order cycle, forming new cells, and integrating systems with this concept: fast delivery to distributors and final consumers." "If we make this structural change work for us, we would have achieved the fastest manufacturing-delivery times possible, from the moment a customer calls to place an order to the time we deliver it and get paid. We would have become a fast company—in a sense a world-class competitor. And as a world-class competitor, our market management philosophy changes radically." page_171 Page 172 "From a manufacturing point of view," said Arthur, "we are getting ready to deliver spare parts from the warehouse in 24 hours or less, thanks to a finished product Kanban we are currently designing. With the creation of work-cells at the manufacturing plant and the setuptime reduction we are targeting, in the first stages of the change we can estimate a reduction in turnaround time for lathe lines from 60 to 15 days." Arthur was explaining this to Robert with a sense of pride and ownership, when I interjected. "This adds to the structural changes Robert and Susan are designing," I said, "to reduce the order cycle. All this combined will allow a drastic time-reduction of the process from the moment the customer places an order to the delivery of the finished product at the factory door. The question for you is this: If in the future it will take only 30 days to finish the process instead of the current 95, does it make any sense having lathes in our branch offices?" "Now I understand your viewpoint," said Robert. "I believe that we should respond to that according to the different products. Obviously, if we are thinking of a sophisticated lathe line in addition to the standard line, in order to have a competitive advantage, those special lathes will always be manufactured according to order . I believe that a customer ordering a special product can wait 30 days instead of the 50 days the competition takes." "Regarding 'standard' lathes, for which we will always receive orders, there might be customers who are not willing to wait even 30 days. What should be done in those cases?" asked Arthur. "Certainly, we would have to evaluate having some of those lathes in stock," I answered. "Do you mean in the branch offices?" asked Robert, staring at me intensely. "Well, it might not be the best place," I answered. "It seems that the most logical thing to do would be to keep them in a central place, such as the plant's warehouse, because that would provide more flexibility to send them to any branch office. Otherwise, we might be sending some lathes to one branch when another one could be asking for them, and this would force us to make costly inter-branch transfers." page_172 Page 173 "And what about the spare parts?" asked Robert. "Arthur's purpose with the finished product Kanban design is to lower plant lead time down to 24 hours. Spare parts are our distributor's main product." "If we get a sign from the market, we would take spare parts from Kanban. If they decreased below a certain level, Kanban could automatically request a replacement batch from an assembly cell. And in practice, we should take into account packaging and transport times, so 24 hours seems like a reasonable distribution delivery target," I answered. "But usually when a final customer requests a spare part," said Robert, "he wants it at once. And this is because the spare part is needed to repair a plant machine, and he cannot wait too long; otherwise, the whole plant production might be paralyzed waiting for that part." "That is right," I said. "Spare parts, and especially those considered critical, should have the highest priority. So even though the plant works with a finished product Kanban with maximum delivery in 24 hours, we must also take into account transfer time to the customer, which is not instantaneous but is sometimes negligible." "Our solution, then, is to have a spare-part Kanban at each distributor delivering 100 percent

service, with those Kanban replacements supplied by the centralized Kanban from the plant." "The role of the branch office should also be substantially changed. Practically, it will become a sales point (for our particular case), transmitting customers' orders to the company that through a fast management and plant cycle would deliver special lathes within 30 days, or standard lathes in a few days. The spare parts would be delivered instantly by each distributor." "Given this scenario, does it still make sense to have branches?" asked Arthur. "Given the image we've built with clients, having local representation is important, so I think it makes sense to have them." Then I added, "I cannot see how we can replace that sales function of the branch. The situation could be different with other types of businesses, but in your case, I don't think eliminating the branches makes sense." page_173 Page 174 "Can you tell us about a company that did this?" asked Arthur. The Elimination of "Distribution Centers" "Sure. A few years ago, I was hired by a food manufacturing company that processed agricultural and farm products. It was company-oriented to the mass consumer market— quite different from this company. The company's plant and its management were located far away from the consumer points, basically in big cities." "Why did they call on you?" asked Arthur, who was now under the impression that I was a hard-core manufacturing guy. "The food company wanted to grow and increase its market share, and also increase profit margin. Those were their main objectives. "The food-processing factory was in fact a series of four plants and silos: A wheat flour mill, a rice mill, a corn flour mill, a balanced feeds plant, and the warehouse section for rice, wheat, and corn, comprising large-capacity silos. "Typically, the wheat, rice, and corn mills followed a similar process. In each plant, the raw material (grains) entered and passed through by a gravity process controlled by different electronic sensors, through a series of cylinders and sieves that, in the case of flour, allowed its classification in two basic categories according to the quality of the wheat. These two basic categories were separated in two different brands, and each brand was divided in packages with 1 kg, 5 kg, 20 kg, and sacks with 50 kg. "After several sieving processes, the maize flour also entered a final packing section, where packing machines processed different containers. The rice plant also had different selection and sieving processes that separated whole rice from half- and quarter-pieces to get different rice qualities separated into different brands and containers." "The balanced feeds plant received sub-products from the wheat flour mill, the maize flour mill, and the rice flour mill and mixed them with other nutrition compounds to produce a balanced feed in different containers for cattle, dogs, cats, and chickens." page_174 Page 175 "What were the characteristics of the competition?" asked Robert. "The company's competition also had their plants close to grain storage places, but far from consumer centers in the big cities. They were facing an extended growth plan and had just finished building a big distribution center in the suburbs of one of the most important cities, with the purpose of reaffirming their presence in the market. "The products arrived at this distribution center from the various plants and were then shipped to the customers, mainly supermarkets and wholesale dealers." "It seems straightforward," answered Robert. "And what strategic threats were they facing with their competitors?" "What they wanted to do," I answered, "was to improve their customer service to levels higher than those offered by the competition, and lower costs at the same time." "They seem to be two incompatible issues: improving customer service and lowering costs," commented Robert.

"In a traditional business approach, they are usually incompatible," I answered, "but their idea was to introduce revolutionary changes to make this possible, and the company was determined to think boldly about innovation—and not just cosmetic changes. Although it is essential to know where you are going first and how to do it to avoid costly mistakes." "What revolutionary changes were proposed?" asked Arthur. "The key idea was to use the trucks themselves—ground transportation—instead of distribution centers," I answered. "Thus, all costs of a distribution center were avoided (infrastructure, staff, fixed assets), and deliveries were made directly from the plant to the customers. So, a pull strategy was applied from the customers to the plant." "What was the company's situation before the project was started?" asked Robert. "Essentially, how were customers' services?" "The plant provided products to a group of regional customers, but their objective was to expand beyond those regions. They made direct deliveries from the plant to those regional customers, but the service was worse than that of their competitors. page_175 Page 176 "For example, customers expected service following a FIFO (first in, first out) principle—that the first orders received from a customer were the first ones being filled. But in practice, that was not the case. "Some customers had to wait 15 days for their orders to be shipped, and others were received the day after an order was placed. Obviously, these random delivery times angered many customers, some of whom represented the lion's share of the company's business." "Why did this lack of standardized deliveries happen in the first place?" asked Arthur. "I'd have to tell you a little about the organization of the company before changes took place," I answered. "The company had multi-product salespeople going around customer areas—that is, they sold all types of products to their customers: wheat flour, corn flour, and rice in all available package sizes and brands. They were basically walking supermarkets. Balanced feed was sold separately to another group of customers. A separate purchase requisition note was written for each product. In turn, these salespeople, supervised by a sales/business manager, conveyed the orders to a Sales Department divided into four sections: wheat flour, corn flour, rice, and balanced feed. In each section, the various staff dealt with the management cycle of the order (order reception, credit control, plant coordination, and delivery)." "Was plant coordination carried on by each sales area with its corresponding food-processing plant?" asked Arthur. "Not exactly, Arthur. For example, the salesperson responsible for wheat flour sent orders to the production manager in charge of all plants, who in turn sent all the orders to the wheat flour plant, consolidated according to brand and packaging type. In addition to that, a clerk in the Administration section was in charge of freight coordination of all the product delivery to the supermarkets and grocery stores according to the purchase orders received from them." "How was each plant's production schedule carried on then?" asked Arthur. "Each plant manager," I answered, "entered the day's orders into the system. They looked at finished product stock in hand—brands and package size, etc.—and the optimum amount to be produced of page_176 Page 177 each item, and decided to manufacture whatever they needed to fill orders or to replenish the finished product stock in the warehouses of each plant." "What parameters did plant managers follow in order to determine the optimum amount to be produced?" asked Arthur. "The optimum amount was determined by the restrictions of the productive system itself, such as the setup time for valves in the finished product silos in the wheat flour plant; the

time required to switch from one quality flour to the other; and also the setup times for packing machines, with the exception of big packages of brand types and small packages that were processed in the same machine. According to the setup change times in these machines, the head of each plant fulfilled the orders of certain brands and amounts, whenever he could reasonably justify a production batch." "And how were these products delivered to the customers?" asked Robert. Well, the person responsible for administration in each section, let us call him the product manager , compared pending orders with, for example, wheat flour stock in different brands and packages on his computer. As a result of this matching, certain customer orders for the wheat flour product could be delivered immediately while others could not. It depended on the amount in stock for each product. "That's why it was possible that a customer order entered yesterday would be filled today, while some orders had to wait 15 days because there was no stock to fill them." "Once this matching of customer orders to finished products on-hand was completed and they knew which customers (supermarkets and grocery stores) were going to receive the goods, these customers were then grouped by geographical areas, and a truck with different brands of wheat flour was sent to distribute the products to a specific area." "Were the same procedures followed by the product managers in the other areas as well?" asked Robert. "Yes, pretty much Robert. Trucks were loaded with packaged wheat flour and rice and delivered them to all the customers in a specific region. page_177 Page 178 "Obviously, analyzing the process, there were two relevant issues. The first was a matter of customer service: The supermarkets preferred to receive the orders (wheat flour, rice, and corn flour) all at the same time. "The second issue dealt with the difficulties of collecting payments. The salesperson for an area was responsible for making sales as well as for collecting payment. Payment (and of collection) was due x days after delivery. Naturally, the collector waited until the last order and product delivery reached the customer before starting the collection process, because otherwise, he or she would have to do it again a few days later. They thought they were managing their time efficiently. "Of course Finance and Accounting did not see it that way. What they saw was lost interest in the enormous amounts of floating capital." "How was the process redesigned?" asked Arthur. "I'll tell you, Arthur, but remember that the original objective was to grow the business by penetrating new regions, and also to lower costs and give an unsurpassed service to customers. The picture I painted for you was just so that you could understand how inefficiently they were operating to start with. To get at the strategic elements of their goals, a lot of cleaning had to be done first. The changes that were introduced were radical and involved all areas of the company." The Customer-Driven Organization "Fundamentally, the change concept was to turn the whole company around to face the customer. "As we said before, if a company is fast enough and it is synchronized, the customers' orders can be entered directly by them (pulled), processed, and delivered, instead of manufacturing against stock. Since manufacturing lead time in the mills was intrinsically short (processes lasted less than 24 hours), there was an additional reason favoring the adoption of a direct pull toward the customer. "To carry out and coordinate the change process quickly, all restrictions operating on the old manufacturing system had to be lifted, and order-delivery times had to be minimized. page_178 Page 179 "These restrictions were found in all steps in the process: customer order entry, commercial

and administrative processes, manufacturing, and delivery. "If any of these chain links broke, the order was surely delayed." "What was the time period set as a reasonable delivery for customer orders?" asked Arthur. "Seventy-two hours," I answered. "Marketing thought a reasonable wait time for an order, at least in the first stages, was no more than three days between the order being entered and the delivery received by the customer—a reasonable target." "You mentioned that the way orders were entered went against this target being reached. Why?" asked Robert. "Because customers' orders entered the process in several different ways. Some orders came directly from clients to the product managers, by phone, by e-mail, or by fax. Other orders were taken by salespeople during their selling and collecting routes, then brought back." "Shouldn't they have considered a lead-time period from the moment the customer asks for the product, and not from the moment the order is received by the company?" asked Robert. "Because it is different; when the customer asks to place an order, it does not always enter the company immediately." "That is true, Robert. We started counting from the moment a customer expressed the wish to place an order, captured through standardized communication procedures so that the customer could place an order without a sales call." "What changes were made to the administrative processing of orders?" asked Arthur. "The basic change was that if the whole company had to face the customer, all sections had to do it," I commented. "So, if the customer placed multi-product orders, the administrative processing and the delivery also had to be multi-product. That implied first a discussion on the value added, if any, by all the existing commercial and administrative tasks. Then it required the formation of commercial-administrative cells to accelerate order entry and process enough to meet the 72-hour delivery target. Cells were designed to deal with multiple products and were assigned to a specific geographical area." page_179 Page 180 "So," said Arthur, "for this company, all customers in a specified area needed only one interface at the cell—one person who had to answer about order status or any other administrative or business inquiry." "Exactly," I responded. "Not only that, which was a great improvement in itself, but each cell was also responsible for achieving maximum efficiency in administrative-business steps: order reception, credit checks, plant relationships, and final delivery." "But the administration-plant relationship changed," said Robert. "Plant managers now received orders from all the cells, right?" "Exactly. Therefore, the plant scheduling scheme also had to be turned around. That involved adding flexibility to the processing and manufacturing plants in order to be able to fulfill any order from the customer of any brand or package size required, regardless of optimum manufacturing batch." "I suppose that plant setups were reduced as well," added Arthur. "Yes," I answered, "we worked with the plant staff in order to reduce setups in all their packaging machines. The plant staff was trained to do setups in the most sophisticated machines, such as mill cylinders. We worked on the sieve setups in the rice and corn flour mills in order to make their setups more nimble." "Were cells formed in spite of it being a continuous line process?" asked Arthur. "Sure, work cells were formed in each mill to prevent temporary manual bottlenecks from occurring during the process through a multifunctional work team. Statistical process control was implemented, and it was monitored by the operators themselves. They continuously checked the quality and performance of each mill, step by step, against pre-established quality and efficiency standards." "Were the mills manufacturing against stock, as before the change?" asked Arthur. "No, since the process was so fast (a 24-hour lead time), they decided to produce exclusively on demand. It might appear riskier at first, but it was actually a much safer way of delivering to the page_180

Page 181 customer, because time was spent exclusively on the products required by the market. Also, to minimize down-time at the mills when demand fell, several qualities of flours in bulk were always kept in the finished product hoppers to be used if necessary. "This allowed a certain degree of flexibility, because since the flour was not assigned to a product name, it could be later converted into any brand and package size. "The reduction of more than 50 percent of setup times in critical machines also favored exclusive on-demand production by order." "How were the freight consolidation issues solved?" asked Robert. "I imagine that now it was more difficult to consolidate outgoing multi-product trucks to an area; it was easier before to consolidate trucks carrying only wheat flour." "We had to design it so that the customer's pull was not only for the customer's order, but for the truck with the customer's order. The truck pulled the plant." "How was it put into practice?" asked Robert. "The orders arrived to the different cells according to the areas they served. They were, of course, multi-product orders from customers. The ordering software was modified to group them according to not only area, but also to city and in some cases to neighborhood. The software accumulated orders by location until completion of full multi-product trucks. "That was the true pull passed to the processing plants. Each plant received orders from the cells and produced different products each day, according to the needs of each cell, as a function of full trucks for deliveries. "Actually, a code was used to consolidate that day's orders for each cell. On 'day 0,' the plants produced the orders, and on 'day +1,' the trucks carrying the route schedule for each cell picked up the exact ordered amounts at each plant and delivered them to the customers." "Were freights dependable?" asked Arthur. "No, they were not, and that was another constraint to be resolved," I answered. "Actually, the truck fleet was made up of more than 30 different companies. A bid was called to have only two contractors: one for the northern part of the country, and page_181 Page 182 another for the southern part. The contract had an exclusionary rule: Destinations were to be notified 24 hours before delivery, and the carrier had to ensure fulfillment. That point was vital if we were to comply with the agreed delivery to customers within 72 hours." "Did you obtain additional price improvements?" asked Robert. "Yes," I answered, "because we obtained a 15 percent cost reduction in freights. But that was not the only advantage. They no longer needed the product managers to waste time negotiating prices with carriers." "What other general benefits were achieved after implementing this change, John?" inquired Robert. "The company reduced operating costs and experienced the expected growth. One of the key concerns was to communicate the fast delivery policy to customers to inform them that they could now reduce their stock in their supermarket warehouses. "The 'days on the street' (excessive floating capital) showed substantial reduction, because collection turned out to be more effective due to the better concentration of orders and improved delivery times. "Furthermore, in the Administration-business section, the growth of the company was absorbed by the cells without having to increase the staff." "One question, John," interrupted Robert. "In that company, the zero stock issue was achieved, probably due to the speed of the manufacturing process. But how were special seasonal requirements dealt with? I mean, at some times of the year, such as winter, when corn flour consumption perhaps increased and daily orders exceeded daily processing capacity, what strategy did they follow?" "Well, there was no variation in special seasonal requirements. Look, Manufacturing shifts are increased, or outsourcing is arranged, or stock is stored. In the specific case of the corn flour plant, outsourcing was excluded. They worked overtime, or increased their shifts, basically weekends; bulk flour was stored in order to convert it into name brands ordered in

hand during week-days."

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Page 183 "I understand," said Robert. "And what happens in a company where manufacturing lead time is not as short as in the food-processing industry? Because in that case, it is impossible to work with zero stock. If there is any manufacturing lead time, you must have stock to comply fast with customer orders." "That is correct, Robert. If you have to work with a certain level of in-process stock throughout the production-delivery chain, then you should consider the Kanban concept for storage of in-process stocks and finished goods as we discussed earlier." Kanban in the Distribution Chain "I experienced this in an industrial company that supplied spare parts (more than 5,000 different items) to branches all over the country." I started with an example to illustrate my previous point. "Their strategic goal was to reduce 30 percent of the stock in the logistical chain, but with optimal levels of customer service. "As it happens with many companies, when a snap-shot of the stock was taken and measured in days of sale-cycle duration, we found that branches had a large accumulation of spare parts in stock. The product mix, however, was very poor. Some spare parts in stock had 300 or more days waiting to be sold, and many of the products were missing." "Why did that happen?" asked Robert. "Due to several factors," I answered, "which when combined in a certain way resulted in the paradox of high stocks and bad customer service. For example, the stocks that existed in the information system did not coincide with reality. Therefore, bad restocking decisions were made. On the other hand, branch stock replenishing policies were not clearly defined and were mostly the result of a branch manager's need to feel safe with a sizeable stock on their shelves." "Were some branches closed?" asked Robert. "Yes, they were. The first logical step was to assess if branches or warehouses were really needed in some parts of the country. First a customer service assessment was conducted among managers in the main branches to find out the maximum time the page_183 Page 184 customer was willing to wait for an item, always assuming the company had the most competitive response. "The results of this assessment showed that some of branches located near the main offices were not needed and that customers could easily be served directly from the main office warehouses." "Who filled customer orders at these branches?" asked Robert. "They were being prepared by the Business Department staff from each branch, and then sent to the main office by e-mail," I answered. "Why were they doing it like that?" asked Robert. "So they would not lose the 'personal touch' and could keep 'ownership' of that customer," I answered. "This in many cases was not justified." "And what happened with the other branches, the ones that were kept in the logistics chain? What changes did they undergo?" asked Arthur. "The purpose was to eliminate the constraints that made the entire logistical support flow fail. A Kanban system was implemented in the central warehouse and in the branches in order to eliminate stock errors in the information system. That implied a special arrangement in branch warehouses, where material location and restocking points were visually indicated, and a Kanban card was released when an order was received. This card was electronically sent to the central warehouse, indicating the batch that had to be replaced." "Then each product in each branch would have a different restocking point and replacement batch, right?" commented Arthur.

"Yes, Arthur," I said. "Each item had its replacement point and batch in each branch, according to the response time from the central warehouse; a reasonable batch size because of shelf-days in the branch; and a consolidated delivery. This way, it was totally standardized for each product, in each branch, when and how much could be ordered; we had a more streamlined ordering and delivery process, and all the errors were eliminated. Although the transmittal of replacement information to the central storage was electronic, the on-site detection of the needed items in the branch was visual." page_184 Page 185 "Did the remaining branches carry all the parts available in stock?" asked Robert. "No, Robert, because certain items, mainly the stock type called 'A,' were more expensive and scarce, but the customer did not object to a 48-hour wait in this case." "These items were kept in the central warehouse so that they could be more flexibly sent to the branch with a specific customer order. Thus, stocks were lowered and better service was ensured." "Was it a quick reduction of the stock?" asked Robert. "After the transition period that lasted about a month, during which each branch had to level its stock of items according to Kanban, we accomplished a stock reduction exceeding 30 percent. And we achieved close to 100-percent service to all customers through Kanban." "Were there changes in the freight system?" asked Robert. "Yes," I answered. "Before, freights were managed by each branch. Now, with the new method, they were centrally managed, with considerable cost savings." Robert was getting it. "If we had to summarize that company's change regarding their logistics flow, we could say that they achieved centralization within decentralization—there was a decentralization of decision making in each branch, and a centralized brain controlling the whole operation." "I think so, Robert. The way you just summarized it is exactly the way world-class logistic systems are headed," I answered. "It implies implementing a decentralized pull strategy for the entire system, which requires uniform operation guidelines such as Kanban in each site, and a centralized brain controlling the whole system." "Are computer information systems implemented after the change?" asked Robert. "Yes, Robert. The most advanced integrated software should be applied after the company has decided how many supply sites remain and with what products, and decided on a replenishing and restocking system. On the other hand, the most advanced software packages on the market consider Kanban and finite programming as standard functions; this gives you the advantage of an advanced technological tool to operate within a decentralizing system of restocking decisions at supply sites." page_185 Page 186 "Once stock level detection is solved through Kanban, the combination of Kanban card and bar code eliminated numeric errors in information transmittal." "So John, which was the most notable issue you observed in that company with a Kanban implementation in the logistic chain?" asked Arthur. "Without doubt," I answered, "the acculturation process for the people in each warehouse. The staff had to get used to a very strict order and discipline environment. A lot of time was invested in educating the workforce as to why the changes were needed and how they would work in the future with the new systems, but there was also a two-month period of handholding and close control to avoid deviations." "Were other aspects of the role of warehouse staff changed?" asked Arthur, intrigued by visions of changes in the future of his manufacturing operation. Cells in Warehouses "Another was the implementation of the work cell concept in warehouses," I replied. "The purpose is to achieve multiple functionality throughout most of the logistical support processes. When you observe all the tasks in any distribution site, you will note an imaginary

line between Administrative and Operation functions. But the process itself is a continuous chain of simple administrative and operational tasks that build a complex process. In the actual receiving of a shipment, there are several examples of these tasks: unloading material, filling in signing forms, updating stock quantities in the system, determining actual location, implementing administrative dispatch, and maintaining stock control." "Does a warehouse cell involve this process as a whole?" asked Arthur. "Yes," I answered. "And if it is a very large warehouse, normally each cell carries on the whole process for a part of the universe of products or customers." "The advantages of warehouse cells are similar to those of cells in processing plants or office cells. In addition, the information page_186 Page 187 and operation flow in the warehouse turn out to be more agile, because when process bottlenecks appear, which are the rule and not the exception in warehouse operations, they are quickly addressed by all other team members in that cell. And productivity increases, because dead times in every function disappear." "I imagine they are also measured at the global process level, right?" asked Robert. "Exactly," I answered. "What really matters are the end-to-end process results: items correctly received, swiftly managed in terms of logistics, and administration. The same applies to items being shipped out. "Actually, we should look at distribution as an extension of an industrial operation of the company, although it takes place in remote locations. Distribution is the last face of the company that the customer sees." At that point, I asked if any other questions remained regarding finished products and the business-to-client relationship, and Arthur reoriented our conversation to the relationship with suppliers of raw materials (business to business). Arthur was very aware that this relationship would be critical for their manufacturing strategy for automotive parts. "We have talked a lot about distribution, and very little about supply," added Arthur. "If I am not mistaken, you mentioned 'world-class' tools, such as Kanban, and 'partnership with suppliers,' which could be interesting to discuss, right?" Business to Business: Don't Place the Cart before the Horse "Of course, Arthur. Everything we have said about finished product Kanban is applicable to raw materials, which relates to your suppliers," I answered. "When it comes to partnership with suppliers," I continued, "it is more a necessity than a tool. I suppose you know that in the business-to-business field, great advances are being achieved within companies taking advantage of the Internet, along with special purpose software. One of the main benefits of so-called 'B to B' is that it allows a parent corporation to page_187 Page 188 talk to its various suppliers about bids and other administrative matters, and also to exchange information about engineering designs and automatically program manufacturing runs for the supplier. "However, for me this interchange of design and production programming can become overautomated in the sense that important improvement opportunities can be lost." "What do you mean?" asked Robert. "I mean that some companies with this type of automated relationship tend to achieve shortterm financial gains at the expense of long-term strategic advantages. Better pricing and quality from a supplier, and longer-term vision would be lacking." "That longer-term vision would be achieved by establishing true strategic partnership with the suppliers, right?" said Arthur. "Exactly. Once those suppliers with whom we can 'associate' are identified, innumerable functional advantages will appear, with greater potential B to B improvements than just the

electronic transfer of information, regardless of its sophistication. "Those suppliers with whom we have developed a relationship are prime candidates to engage in a continuous improvement cycle of the relationship at a process level, stimulated by each company's customer-supplier departments that can communicate horizontally: Engineering with Engineering, Purchasing with Purchasing, Production with Production, etc." "I understand," said Arthur. "If we do our homework right in selecting our key suppliers, and with a longer-term vision, we could 'leverage' the potential of the Internet—the ability to share blueprints and designs with suppliers, make transactions, share knowledge databases— but never replace the human, face-to-face relationship with automation. This way, the relationship with suppliers would grow and evolve further than merely achieving better pricing and lower costs." "Talking about the potential of the Internet," added Robert, "could we discuss possible scenarios on how this new sales channel is going to affect us in the future? Electronic commerce is becoming the consumer wave of the future." page_188 Page 189

Internet + Speed: The Combination for NoIntermediary Systems "Robert, I think this company has a unique opportunity here: with the company's processes based on a cellular approach organization, our goals to 'speed up' the plant and the offices, combined with the possibility of the end-consumers of spare parts entering the Internet age, open up a new world of possibilities. What would happen is that many people will not need to contact a distributor; instead they can just 'click' on the Internet screen, and because of the standardization of your catalog, they could request the order directly to your factory at the plant." "But that implies a greater danger," commented Robert. "The distributors are the 'face to the customer.' Will we be able to give the same customized service from the plant? Will we have the same response time as they have? Won't the customers drift to the competition if we don't? Wouldn't it be necessary to support the customers by providing some type of technical advice?" "All the topics you mention are valid ones, Robert," I answered. "Let me take them one at a time. It is true that if we serve end-consumers directly, the administrative burden will increase and that personalized service is endangered. However, that would also happen in a 'traditional' organization if customers accessed the factory directly, but with an even more serious difficulty: they just could not do it, period. On the other hand, in a process-based organization, each factory work cell can customize and continuously improve its relationships with customers and have a much better productive capacity to serve an increasingly larger number of customers. "You must also consider the response time to inquiries and claims. This should be added to the production acceleration tools we talked about (reduction of lead time) that you are implementing in the plant: production work cells and pull systems, together with setup reductions. "But there might be a valid technical or commercial argument to justify offering the possibility of face-to-face technical support for end-customers or simply the trust relationship with a distributor built page_189 Page 190 up over the years. These considerations might move you to decide on the more gradual introduction of a disintermediation strategy." "Do you mean," asked Robert, "that we should keep the current distribution net?" "Yes, there is goodwill value built up with them," I answered, "but you could ask them to partner with you in a different role. For example, they could become sales and technical advice points where orders could be received through the Internet and forwarded, also through the Internet, to you. The dispatch of the orders would still be done directly from the

plant." "That might imply the renegotiation of contracts and sales commissions, since they would no longer carry the stock burden," commented Robert. "Yes, of course, Robert. That is one of the most sensitive issues, but without a doubt, it is one of the most concrete ways to reduce costs in the company, since the sales commissions are a direct impact to this company's bottom line. "But, even if we do not apply a 'no-intermediary' approach via the Internet, as Arthur commented, all the efforts we are doing in the manufacturing plant and in the offices to be faster and nimble will already give you huge benefits: less stock in process, less finished product stock, more variety, higher productivity, better customer and supplier relationships, etc.," I replied. "And it also prepares us for speed when the Internet becomes more extensively used by endconsumers," commented Robert. "…And with a competitive change, it will be very difficult for the competition to emulate," I added. There was a lot of thinking to do and work to get started at the plant and various other departments; the goals were clear and everyone had their marching orders. Arthur and Robert finished their coffees, while I telephoned the office to check my next appointment of the day. It had been a good discussion and one that I believe had solidified the Phoenix project team. I made a note to call Martin to brief him on our progress, and to schedule my next work session with Klaus to discuss changes in management compensation, succession plans, and executive leadership development. Everyone headed their own separate ways: Robert and Arthur drove back to their offices and I decided to walk downtown to page_190 Page 191 meet with Mr. Antonio in an hour. The local Machinists Union was only three miles away. A languid afternoon sun hit me in the face; it was a good feeling. page_191 Page 192

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Page 193 6 Implementing Changes at the Factory Three months had passed since the launching of the Phoenix project. I lost my eyes in the distant skyline appearing through the pane of my office window, and I wondered about how the events had developed. Martin actively participated in the various stages of the Phoenix project. He met with all the members of the staff, holding more than 20 hour-and-a-half meetings over the course of two months. In each meeting, he explained in simple language why everyone in the company had to change and why they had to produce more, manage better, and sell in a different way. He accepted the possibility that he would probably make a few mistakes if he bet on creativity, but he said that he preferred an error now from an uncertain new idea to the almost certain failure for the company and everyone in it if they continued on the present path. He spoke about taking risks as part of being a businessperson, and he encouraged all to take risks within a framework of mutual consideration and respect. He spoke about responsibility and mentioned that we were all accountable for what occurred at the company, either good or bad.

He spoke about generosity and commented that those who shared their best ideas and helped others unselfishly would be the future leaders of the company. He spoke of respect for those who had years of experience in the business, for their co-workers, and for customers who allowed them to have the business they had today. Finally, he spoke of total transparency and ethics: the ethics of the company dealings with customers, the government, the page_193 Page 194 community, and competitors. He said that his e-mail would be open to everyone for any suggestions they might have, and promised to read them and respond. Martin had also been involved from the beginning in plant change projects and with Administration. He followed the proposed time lines and held progress meetings with each group. He exchanged strong words with Robert, who in front of everybody in a work meeting said, "I am afraid this sounds just like another change of the many that we've had before. Let's hope this one really works." He also met with union delegates, and explained why the Phoenix project was to be implemented and why he needed every-body's collaboration in doing that. When the delegates asked if the company planned to fire people, Martin was totally transparent with them. He told them that he could not guarantee anybody's job, not even his own. But if they helped with the change and contributed to the productivity increase, he would personally guarantee a job for everyone. He commented on the purpose of the company—like any other company, to make a profit— but he also shared with utmost sincerity his commitment to a process-based organization, to people working with dignity, and to happiness. He was firmly convinced that the people working there had the intellect and the passion to produce automotive parts of the highest quality and successfully compete with anyone in the world. Changes in the Factory That afternoon, I went to Arthur's office, located on the upper floor of the factory, from where you could see everything. "How are you, John? Are you here to visit the plant?" "Yes," I answered. "How are the changes coming along?" "It varies; some people are very enthusiastic and others not so much. I believe that deep down it is a matter of personality, not of the project or the company. What do you think?" "It is like this most of the time. There is always a group ready to help, to collaborate, and to contribute with ideas for the project. But others don't feel like that, and they put in only the least possible effort. Your leadership style is very important to convince page_194 Page 195 the more reserved types. People want to see acknowledgement reflected in your acts and the image you project to convince themselves that the change is real, and that it is the right road to follow." "This is exactly what I am doing, John," answered Arthur. "We formed the project team involving practically all the lead managers. No one was left out, and all have a role to play within the team. But I believe that our greatest challenge is going with the supervisors." "Why is that?" I asked. "Because," Arthur answered, "they have difficulty understanding the new philosophy. For example, with the set-up reduction issue, the most complex machine changes were accomplished by supervisors, not workers. One of the first actions we started at the plant was subjecting critical process machine setups to the appropriate methods, such as multispindle automatic lathes used to mechanize large-volume parts." Small Steps "We achieved significant changes in setup time reduction by organizing a work team in charge of the change," added Arthur, "and we developed a setup methodology and placed it on the machine so that it can be observed by everyone. "When we asked a supervisor to help us train the new working team, formed exclusively by

workers, we received a negative reaction." "Who made the changes before?" I asked. "Before, he and an assistant made the change. In principle, he said yes, that he would train the workers, but in practice, he keeps doing the changes in the machine by himself." "Did he participate in the work meetings intended for the development of a new method and the introduction of technological improvements?" I asked. "Yes, and in fact he brought up several good ideas." "Have you spoken to him, Arthur, in order to find out why he does not delegate those tasks to others?" "Yes, I have asked him to sit down to talk with me several times, and I explained how I want to use his brain, not just his hands. I do not want to keep seeing him all greased up, and I need page_195 Page 196 him to become a resource person to help others address multi-spindle lathe issues. I also told him that I want him to have a more active participation with engineering in the future design of parts. And besides, I told him about the idea of creating an internal 'school' to train and educate in these new concepts the new people we incorporate to our business. It would take only about 50 percent of his time to dedicate to the school." "And what was his answer when you said that he should teach and coach the worker team to do the change, instead of doing it himself?" "He told me that for him, the most important issue was seeing that production kept going, and that the workers were too slow, so he decided to do it himself." "I believe that several things are happening within that supervisor's head," I answered. "For example, all this has been a sudden change, and forces him to re-analyze his job, a job that he has been doing routinely for years. "He probably also feels insecure and thinks, 'After teaching the workers, what will happen with me?' or perhaps he is just a good doer but not a good teacher . Doing a task well is not the same as knowing how to teach others to do that task," I added. "Then, what do you suggest we do?" asked Arthur. "Is he a valuable person for you?" "Of course, his experience is invaluable. He knows every die in the plant by heart." "Then the first thing to do is to make him feel at ease. Look at him in the eye, tell him you consider him a valuable employee, and perhaps explain to him the added value to the production operation that he could help produce by sharing his knowledge. Afterward, we will arrange for him to attend a special program for mid-level personnel in his situation. It is difficult for people to manage human issues in interpersonal relations unless they have an innate talent for it. "When an employee turns from supervisor to trainer, he needs to be re-trained himself. He has to learn the basics of leadership, group dynamics, and conflict resolution. He needs to be reassured that the company is ready to pay the cost of retraining people on the new methods and the new technology. page_196 Page 197 "As an example, there is now a new setup reduction method designed to shorten periods of time by a significant percentage. It is a perfectly reachable target, since the improvements in organization and in technology provide a real base on which to do it. Yet it will take at least one to two months for the workers to reach the target through learning. Meanwhile there will be errors, and the process will take longer than expected. But that is the road to follow. We might be able to help them, but we cannot replace them in the task they are working on." "I agree," said Arthur. "An effective way to do this from the very beginning of the project is to show that we have faith in the people potential and that we want to train them and ultimately see them succeed in their jobs."

Initial Benefits "We are also applying the new setup reduction method on other machines," commented Arthur, "and the advantage we observe right away is that even without forming the cells or implementing Kanban, we have been reducing process stock and finished product stock in significant amounts since last month." "How are you doing that?" I asked. "Simple, a monthly product manufacturing plan was carried out; it was launched in the plant at the beginning of each month. This meant that the parts production orders corresponding to one month of finished products started to circulate through the plant. "Optimizations in each area depended solely on the section supervisor and were related to the selection of sequences of production for orders emitted by MRP. With the monthly program, some sections supervisors accumulated large batches of parts, since the manufacturing orders called for the total amounts necessary for that month." "That implied costly high in-process stocks, and large manufacturing lead time," I answered. "Yes, but in addition, the end-of-the-month syndrome occurred. From day 1 to day 15, we pushed within each manufacturing section the maximum possible to comply with standard production costs. From day 16 onward, I started synchronizing a page_197 Page 198 home-made pull through the manufacturing activators or expediters. Through these activators, we accelerated execution of the 'little brothers' (sub assemblies) of the part so that they could reach together the setup section. This produced large dispatches on the latter days of the month," Arthur explained. "The larger the batch, the more complex the synchronizing becomes. It is not as easy to synchronize two elephants as it is two mice," I answered. "But now, having accomplished a first setup reduction in critical machines, we are running weekly productions instead of the monthly program, along with the weekly launching of production orders. We now have smaller batches (which we finish in time due to the setup reduction), we have less in-process stock, and I have less trouble synchronizing production," Arthur continued. "That is superb. It will be even better when you reach the Kanban stage," I said. "After implementing the production cells, you will follow a daily programming module, and you will not need activation or expediting. "The Kanban cards will be automatically directed toward the cell that has to restock parts. With a daily production program, and the plant totally synchronized, everything will be manufactured at the right time." "What do you think so far from what you saw in our setup reduction?" asked Arthur. "It is going well, Arthur. Everybody is collaborating: maintenance, engineering, supervisors, and workers. I've already seen in the presses that dies have been placed behind the machines so that they don't have to go and get them from the die shop. I am beginning to see nuts and screws replaced by fast adjustments, and guides to center dies all at the same time. Essentially, what I am seeing is a synchronized team making the change. It is very encouraging," I said as Arthur gave me a satisfied smile. "I have to confess," said Arthur, "that I had to put on hold excellent ideas that implied a big investment. They come mainly from the engineering team in our plant, because they believe that improving setup times is a purely technological consequence." "Look, as in everything else, there is a moment when you cannot squeeze further in a machine change time reduction, and you page_198 Page 199 have to do it through technological means. That is good, but it is best left for a second stage." "Changing the subject, Arthur, I would like to take advantage of your offer to show me the plant; I am curious to see how the cellular work team implementation is coming along." From a Section-Based

Factory to a ProcessBased Factory "How is process analysis advancing?" "Frankly, John, it is a labor-intensive task, but it is stimulating at the same time. It is like seeing a doctor for an annual physical, only to discover that many things are wrong. "By analyzing the processes required for each part, we are discovering surprising things. For example, we are now seeing that the decision about which machine mechanizes a part has many times been arbitrary. And the result is an under-utilization of the most efficient machines we have." "Another thing we have observed while discussing the manufacturing processes of the parts we carry is that many parts have similar processes with only small mechanizing differences. An interesting question came up about why the Engineering Department had not unified designs and eliminated some costs of manufacturing by reducing machine setups." "Where does Engineering get their requirements?" I asked. "They get them from the Sales section, for which they produce different prototypes, together with the Die section." "But, Arthur, what participation does Production have in the process?" "Frankly, John, not very much. The blueprints go to production with a few notes about tolerances on the margins, but there is not much communication between Engineering and Production. How should we deal with this issue?" "Look, I think that now we have a unique opportunity to implement work cells," I answered, "since you are analyzing the processes for all parts. It is important to include the folks from Engineering on the teams, not only to analyze a possible rationalization of the number of parts, but also because cell formation also implies the reassignment of parts to machines. page_199 Page 200 "Once cells are implanted in this company, the people from Engineering should think like this: 'Is this future part easily manufactured by cell X? Is the design the most practical for a fluid manufacture, or does it require building up complex dies and difficult machine setups?' "In summary, this is designing by looking at the cell ," I said to Arthur. "Therefore," added Arthur, "there must be a much larger integration between Engineering and Production sections." "And also Sales," I commented. "Sales is not a permanent working cell , as the ones being designed for the plant or the office. But it does function as a cell in the sense that it is working on the process: 'Design of new parts and products.' And logically, people should participate in and be in close contact during the process. Thus, an interaction is produced between those who know the customers, those who design parts, and those who manufacture the parts in order to produce at the lowest possible cost. "But since I do not want to confuse you, I would not call it a cell, but rather a team in charge of the design process . Obviously, as in any process-based organization, team effectiveness should be measured through global parameters: Process lead time, use of resources (team working hours), and output (compliance with the needs at the lowest possible manufacturing cost). "Besides this potential issue on parts rationalization, what other topics have become apparent while reviewing the manufacturing processes?" I asked. "Well, John, we are discussing process value according to a cellular vision. We do not merely ask, Does this operation add value for the customer? which in itself is interesting, but instead we analyze future speed as an additional element to value analysis. For example, up to now we applied an anti-rust agent to cover some delicate parts because they remained for some time as stock in process, but from the point of view of the work cell, we will not need this cover because the part will not remain stored for long." "Do you know by now how many people will be assigned to the teams in each work cell?" I asked.

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Continuous Improvement in the Cell "We are making progress, John. Once value analysis is completed, and we have a better grasp on the elimination of unnecessary tasks or overall simplification of operations, we will start the redesigned process (like the creative destruction we spoke about earlier). Then we define the cells that will work on the process. At the present time, we are calculating the labor requirements for the first cells we've defined. "We noticed that the amount of people servicing a particular process is usually a fraction. For example, for one mechanized section cell, the number is 3.5 individuals," Arthur looked puzzled. "Certainly. That amount, or a larger one, is currently used by you to manufacture the product, right?" I responded. "What happens is that people are not assigned to a process now, but rather to individual machines, and the supervisor moves them according to need. When working on a process where machines are assigned to the process and are next to each other and there is a family of parts related to it, there is no reason why it should result in a whole number."

Figure 16. Production Cells: Quality and Efficiency "But how do we divide the work for the 3.5 individuals obtained for the process? Do we make four individuals work at less than 90-percent capacity? Or do we make three individuals work at 100 percent and the last at 50 percent? Or …?" page_201 Page 202 I interrupted. "Look, Arthur, in this case, common sense indicates that you apply the last alternative: three individuals at 100 percent and the last at 50 percent." "But isn't that a bad example for fellow workers?" Arthur insisted. "No," I answered. "Because all has to be shared with the team in that work cell, including workloads. The ultimate target is to have group meetings to choose from several options— design automation, task elimination, design changes or simplifications—so that the operation can be done by three rather than four individuals. But they have to do this by themselves,

with your coaching." "But that is a very complex human issue," commented Arthur. "How do you motivate a group to leave out one of their team members?" "That is impossible, Arthur, even when seen from a cold, Taylorian point of view. The greatest factory change is the least visible. As Saint Exupéry said, 'The essential is invisible to the eye.' In this process, the essential is not the dramatic change of procedures, technology, and operating practices brought by the cell concept. The essential is what happens in people's minds. When plant work cells are formed after a great effort, then the real change starts. "The real changes can be made by the team, because the process is in sight. It is exposed in the cell. The stock in process is also exposed in order to show our mistakes. When there is an excessive accumulation of stock, it is because things are failing, there have been schedule mistakes, the cell has stopped abruptly, or a cell has not worked with the proper output due to absenteeism. "Since mistakes can be seen, they should also be corrected by those who catch them. This is the fundamental premise in a process-based organization. Any person who can visualize a cellular plant understands where the problems are. The order brought by cellular flow is very different from the old ways, where different machines coexisted with diverse products and different individuals at each machine. page_202 Page 203 "Once issues are exposed, it is important to develop a culture of change and continuous improvement. This is not a simple declaration of principles, as many total quality management (TQM) programs were started and soon terminated. This is a true agreement between the company and its people, between labor and management that must be expressed in specific terms, such as the assurance that productivity improvements will not result in firings. "For a company with financial problems, this might be difficult to accomplish. The company might require major surgery, and it might have to take drastic steps long before going to a cellular concept. It might have to rethink its products and services, or undergo a merger or any other macro means before facing a post-reengineering process with sufficient mental clarity, patience, and resource assignment." "Is what you are trying to tell me, John, that some companies might not be ready at the ideal time to start a sophisticated process-based organization project?" "Yes, Arthur. Process-based organizations should not end up in a violent downsizing. If that is needed, then do not do PBO until you are done with downsizing. In this type of change, the ultimate objective is to achieve the perfect structure for the next step: continuous improvement. This structure is the plant work cell, or the office cell, or the management cell, with constant process improvement, taking advantage of the competition, and based on the intellectual and emotional energy of the people in the organization. There might be companies out there—and that's not the case in this company—where some basic things must be completed first before going to a cellular structure and PBO. It might also be that, even here, when designing the future, the organization lets some people go—people whose styles do not coincide with that of PBO and who cannot be absorbed by the future organization. But once a process-based organization is implemented, structural stability must be a top management mandate—thus the importance of process improvements to adjust to environmental change. It is a virtuous cycle, always requiring to be fed: More productivity makes the company more competitive, this implies a gain in market share, and the cycle goes on. Therefore, the whole company, page_203 Page 204 one team at a time, resonating within and without, is part of the same orchestra and the same symphony." "I understand," commented Arthur, "that we have to base the company on cells in order to facilitate the permanent continuous improvement process in each of them. But the term

continuous improvement sounds a little vague. How is continuous improvement defined, and who defines it?" "This concept shouldn't be vague, in the sense of improving anything in sight that doesn't seem right," I answered. "This does not optimize an individual's time in isolation. It is not a 'suggestions box' program, either. "The difference between the cell and another spontaneously formed work group or ad-hoc team is that the cell is a permanent group of individuals, with qualitative and quantitative preset objectives, who allow themselves to be 'team' in their collective act. Their overarching goals are constant and very precise, to be achieved in the least possible time, fixed by their management, but subject to revision based on the continuous improvement process. "In the case of this company, for example, the defined competitive strategy deals with the manufacturing and sale of a special lathe line, together with a standard one, and with being better than the competition in price and terms, working with minimal levels of stock. "Translated to each cell in the plant, this competitive strategy implies that the workers themselves (the people in each cell) are measuring lead time or delivery term for each item produced by the cell, materials, and labor costs. "Once the design of the metrics with which to measure cells is complete, the workers determine specific targets for the cell: for example, lead-time goals and productivity goals, such as hours and materials employed in the production of items, rejected parts, etc. "This way, each cell is an orchestra within the same symphony, in the plant and the office, with the exception of those centralized departments that have not been turned into cells, that should interact indirectly with the main production process." "The message is: Few and clear goals and objectives," said Arthur. page_204 Page 205

The Human Aspects of the Change In the afternoon, I met with Martin to discuss the status and progress of the Phoenix subprojects in the plant. As usual, Martin was participating in progress meetings with the project team and knew its technical situation quite well, although he was not aware of the details of the human aspects of the project. Klaus, the manager of Human Resources, was overwhelmed by the technical changes in the factory that he didn't fully understand and tried to concentrate on the aspect that worried him most: to change individual incentives in the plant to a group reward-and-recognition system. "What is your opinion about how things are moving?" asked Martin. "As you know, I've been regularly attending your progress meetings, and we are complying with the agreed-upon work schedule. We have suffered some set-backs in areas that were later resolved, and that is normal. Essentially, in the technical design area and the formation of work cells in the plant, right now it is more important to use common sense than any other tool," I replied. "However," said Martin, "I feel things are happening, and the workers are not being told." "Generally, it is my experience that people are reluctant to talk about human issues during progress meetings. On the other hand, they speak at length about technical issues. For a lot of people, human issues remain something very intangible, and they are reluctant to speak about a topic they know little about, as opposed to technical or industrial issues. "Some managers believe that it's not their responsibility to report people in their team who are not collaborating, but that they should speak up on their own. "Others prefer to play a power game, to discover the direction the change is taking, evaluate their options, and keep their mouths shut until they're sure about the consequences. To think about a how-to change management handbook is nonsense, but you could page_205 Page 206 identify the reluctant and the proactive. Who guarantees that intuition does not fail?"

Martin had a response. "Only a few months into the project, I'm not able to identify profiles the way you mentioned, but I'd like to share with you some expressions I've been hearing. "For example, last week I held a meeting with the head of the Tools & Dies section, who presented the die-modification budget. One of the key requirements for reducing press change times is that all dies must have the same height so that no time is lost in leveling heights during the change. After he presented the budget, I asked him his opinion on the project, and he answered that he would rather not give an opinion. "When I asked again why he said that, he expanded a bit more. He commented that he understood a great investment in dies was being done, but he believed there were other priorities in the section, such as buying a newer model press." "What did you tell him?" "John, I tried to explain that things were different now, with a new vision. And then I tried to get him involved. I explained that what he might see as just a die re-design actually has deeper commercial implications. Then I took him aside for about 10 minutes to explain three things: the relationship between dies and fast setup changes; the greater power of being flexible in our production capability; and lastly, the competitive advantage of manufacturing special machines for our customers. "I also commented that my main mission toward the shareholders was to create value by assigning the company's capital in the best possible way. As an example, I mentioned that I had given a higher priority to the re-design of dies instead of the acquisition of a new machine, because the latter would not provide the ultimate required flexibility. "I also explained that according to our new manufacturing concept, if new machines were to be bought in the future, the issue would have to be assessed in full based on the new situation of the company. Perhaps with the money a new machine costs, we could buy two second-hand ones instead, in good shape, because two machines would give us more flexibility than one. While one is working, we could prepare the change in the other one." Martin page_206 Page 207 felt he had done well in convincing the worker about the need to change. "I believe that you could have convinced him technically, but normally the technical explanation is the external solution to something much deeper," I added. "What are you trying to tell me?" asked Martin. "That even after thousands of years of civilization trying to suppress feelings in human affairs, we have not changed much when it comes to facing imminent change and our emotions. Individuals first react emotionally to keep the status quo, and then try to rationalize their fears. It is an unconscious flight to safety. This worker is sensing a possible danger in this change, and he can't yet grasp the extent of the change and its implications. The way he rationalized this fear is concern for the company. But subconsciously, he feels that his safety comes before the safety of the company . The perfect technical explanation you gave him fulfills the safety of the company part. But you have not taken care of him yet, have you?" "He has to know that the safety of the company means safety for him," replied Martin, somewhat hesitant about his own words. "Those are advertising words, Martin, which are true if everything goes as expected. Even though one of the basic premises of PBO is that this is a growth project, and not a layoff, people need something else. Truthfully, you cannot assure anyone that they'll keep the same job, not even you, and that in itself is a loss-feeling that needs to be addressed. "Something you can do to increase the individual feeling of safety, besides reassuring him that people will not end up without a job, is to get him involved in the change process. Make him feel that he owns a part of the change. He will feel that the new way is a part of him— that it is inside him. He will develop a positive mental attitude, which will become his best lifeguard in a rough sea." "Could you define the word involved ?" asked Martin. "Involved means that he has been assigned a specific task. What deliverable does he have in the Phoenix project?" "None, as far as I know," answered Martin. "He received the project notification from his

manager, and the people working in the setup reduction gave him the conclusions from a series of studies." page_207 Page 208 "Did the machine operators participate in the setup improvements?" I asked. "Yes, John. That is the philosophy." "Yes, but I'm a little worried about not being able to get all the workers involved," I replied. "We are forgetting the great number of people who support production in the plant. It is important that Arthur goes over all the names of people in his area and assigns a specific mission (not more than a two-line description) related to the Phoenix project and each employee. He cannot afford to leave anyone behind," I added emphatically. "John, how would you define the mission of the Tools and Die section?" asked Martin. "For example, (1) collaborate with the design of setup improvements, (2) carry on the proposed improvements, (3) teach the setup procedures to the other workers so that they become autonomous, and (4) propose a change in his section (Tools and Die section) to adapt it to the new plant." "Do they all have to know their mission in the project?" asked Martin. "Absolutely, Martin! Even though their mission might just be a recheck and validation of the work done by others, the fundamental premise is 'people first, technology second.' No one in your factory should feel a loss of dignity in what they do in front of their fellow workers— their brothers and sisters." "I agree," said Martin. "By the way John, how did the meeting at the local Machinists Union go with Mr. Antonio? You haven't said anything about it." "Actually, it went really well. Although he acknowledged having locked horns with Arthur a few times, he respects him very much and has confidence in you as a leader and in your management team as a whole. I briefed him on the Phoenix project, since a few of the stewards in the plant had expressed concern about replacing workers with technology, so I wanted to explain to him the philosophy behind PBO and the work-cell organization approach. But I especially emphasized the no-layoff policy that you are following." "So what was Mr. Antonio's reaction? I'm really curious," said Martin. page_208 Page 209 "At first he listened very intently to my explanation of the project. Then he explained to me the basic concerns that any union would have under the circumstances. For example, he said that an important thing to keep in mind is why people join the union in the first place. A union gives workers the right to grieve, organize, bargain for wages and benefits, and be represented by union officers in collective bargain negotiations with management. He expected us to respect these fundamental rights and keep everyone informed of how these changes would impact them. The management team is meeting with the workers and stewards to inform them of all changes as we speak. Your management team has been cooperating fully," I explained. "Yes, we've had these discussions before; it is very important that our workers are treated properly, with respect and dignity. A union steward can take time from the work cell to attend to their union duties. We've agreed that when they're negotiating, they get time off the clock, but when they're not negotiating, they're back in the plant working. They'll be compensated by the union or by us, depending on the reason for the leave of absence or duration, but their jobs are secure," replied Martin. "And the cell structure allows this flexibility much better than the traditional manufacturing organization, since the team members can more easily back up one another," I added. "John, what were his concerns regarding technical innovation?" Martin had heard some rumors about this. "The obvious concern is the replacement of jobs by technology," I replied, "but we quickly addressed that, since PBO puts the human being before technology. I explained about worker involvement and the assurances that although jobs would change, everyone would be employed at the end of the project. This explanation was very much along the lines of your

explanation as to why we don't want to upgrade to the latest equipment now, and instead want to keep two machines with multi-skilled machine operators within the work-cell team." "Was Mr. Antonio concerned about workers' wages with the new system?" Martin asked. "Yes, that's always an issue in labor relations, but we agreed to be totally transparent in our revisions of salaries and incentive page_209 Page 210 methods (cell awards and recognition of superior performance). Klaus and I are working together with the stewards' input, and eventually Arthur and Mr. Antonio will review it before the final proposal comes to you," I replied. Martin was pleased that I had taken the initiative to contact Mr. Antonio; he did not think that Arthur was the best person to do this, and he was right. A good labor relationship was a very sensitive but important concern for the future of the company, and Martin understood that. "You know, John, I've always shared the same principles of the labor movement: the ethical treatment of labor, with equality, justice, and dignity on the job for all people, not just for some people. In other words, I am committed to seeing that everybody in this company—regardless of position, education, or skill level—is treated fairly without favoritism and is respected by everyone, and that there is no discriminating against one another based on age, race, or gender. Just like we are now turning the face of the company toward the client to improve the business, I also want the Phoenix project to help us not lose sight of labor and employee relations; they are both equally critical to our future success." Martin paused for a few seconds to collect his thoughts, and then he asked his assistant to set up a lunch meeting with just Mr. Antonio to talk about strategy. I was sure Martin would share with me later any issues that were appropriate for me to know. Toward an "Intelligent" Organization "I believe," commented Martin, "that the management evaluation form of the project managers—Arthur, Robert, Susan, and Klaus—will have to include the specific goal of assigning every individual in the company, and not just the members of the management group, an aspect of the Phoenix project. It seems that we are just starting to walk in the right direction, but there is a long way to go." "Yes, Martin. The preparation for change and the participation in change make up the first step. The second step is the implementation of change , the creation of a process-based organization, the cell concept, etc. And once the infrastructure for containing the change page_210 Page 211 has been built, the third step is to allow people to create and innovate continuously, and to maintain the improvement spirit ." "Could that improvement spirit be achieved without all this extra effort? Could it be done in an easier way?" asked Martin. "Definitely not. Remember, Martin, that the improvement spirit you'd like this company to have is embodied in a collective act of emotional display or passion for improvement that is often triggered by emotional contagion where there is close social contact—that is, the team that forms the work cell. If you want that team emotion to be something permanent, you need to build a supporting structure where this type of feeling and emotions can be selfreinforcing and can flourish; you need to remove the obstacles that get in the way of this team emotion that emerges, which can then be displayed in collective acts that correspond

to that improvement spirit. But to build such a supporting structure and remove the obstacles that impede the emergence of team emotion, one needs to understand first how the dynamics of team emotion operate at a conscious and subconscious level. "Let's do a little exercise to illustrate this point," I said to Martin. "Suppose you used a series of management tools to reach a certain synergy between individuals in a team and you implemented, for example, a communication program, an employee's suggestion program, or a team-building group program. No doubt that some very interesting things would begin to happen. You would probably receive suggestions and improvement ideas, and people would build relationships until the realities of the old organization structure hit them in the face. Are the new ideas aligned with the priorities of the company? Are people using their individual mental energy in the most productive possible way? Are the ideas explicitly connected with one another such that they are consistent with the process improvement? Are good relationships severed because incentive programs work against team building? In short, are our good but dissonant intentions working against the cooperation and camaraderie we are trying to foster? "When we think about all this and we see that in a company with 2,000 employees there are 2,000 individuals, all working on different functions, it seems very complex to organize and synchronize this mental energy through pure managerial brute-force," I added. page_211 Page 212 "Martin, do you remember when we were talking about using cells to simplify the application of any production programming system, Kanban, constraint theory, and so on?" I wanted Martin to stay involved in the exercise. "I remember," said Martin. "I understood that it is much easier to program a plant with 100 machines-processes (cells) than to program it with 1,000 machines (hardware)." "And that was a logical conclusion, since it is much easier to coordinate the interactions between cells than the flow of parts between machines. I have the distinct impression that the complexity increase is not proportional, but exponential, to the amount of the working elements you must synchronize. Well, the same criterion applies to synchronizing the mental energy (instinctual and emotional energy) of an entire organization," I answered. "Imagine a traditional organization with 2,000 different individual beings that must be synchronized toward general and common targets. In addition, you have to make them turn away from their department alliances and interests and think at a global level; you must keep them focused and interested in their work, marching as an army of workers toward the same business objective. "Now imagine you want that same traditional organization, which is so busy that it can barely keep a global business vision in sight, to take advantage of all its 'free' time to try those innovations you want to put in effect—those new management tools—not part-time or once a week, but continuously. Martin, as you know, this type of change by management brute force has been tried before, and it still is for the most part the prevalent approach; however, it does not work. It is much better in the long run to create a permanent work cell-based organization based on processes. It is somehow easier to synchronize teams than to align personalities, idiosyncrasies, or hardware." I let the ideas sink in, and waited in silence for Martin to react. "I think that what you just expressed is 180-degrees different from what some people understand an intelligent organization to be. Basically, what you are telling me is that in order to achieve an intelligent organization—one that is naturally human and that can learn and evolve as needed—individual motivation and individual innovation are not enough. The simultaneous formation of an page_212 Page 213 infrastructure channeling the emotions and intellectual energy based on human values is much more effective and easier to set in motion." "That is right, Martin. That infrastructure means basically a process-based organization." "Later on, you can introduce new technology, implement an integrated computer system, or

come up with an Internet-driven solution since they also increase execution speed. But what will flow through the veins of the new systems, built on top of the process-based organization, is fundamentally ordered but flexible, standardized but adaptive, and technologically advanced but human, from its very core. I have seen examples of selfproclaimed intelligent organizations, and they are partially so at the individual motivation and innovation level, but not at the strategic collective level. In general, the degree of entropy and lack of synchronization is high, and valuable human and intellectual capital is wasted." The First Cell in the Factory The following Friday, Arthur was about to show me the progress made in the identification of plant work cells. Up to that moment, it was all paper and pencil, and verbal communication. The effort to integrate all workers to the Phoenix project had been important. Special training classes were designed internally by the more senior supervisors and machine operators, and were offered to groups of up to 20 workers from different areas of the manufacturing plant. Synergy and crosspollination of ideas, skills, and factory sub-cultures were starting to emerge. A few critical emotional incidents caused by the inevitable clashes among some workers and supervisors took center stage, but not for long. These incidents were expected and diplomatically handled by the groups themselves, the directors, and some former supervisors. I had participated in several of the all-staff meetings and was able to corroborate first-hand a rule-of-thumb that is followed by other companies during the change process: workers understand the why and how of set-up time reductions and why cells should be formed much faster than do some of the plant engineers, and it has page_213 Page 214 nothing to do with education, management level, or college degrees. It does reinforce the fact that no matter where they happen, bad-process habits are hard to destroy and then recreate. Some engineers believed that they had to unlearn concepts they had learned in college if they were to move toward the new way of thinking. Meetings were set up with the union delegates within the company. Arthur explained the purpose of the project to them, and we talked about the technical tools needed to carry it forward. When the delegates asked if people would be laid off, we told them that the purpose of the Phoenix project was not to fire people, but to allow for growth in the company. We pointed out that nobody—not even the president—could be assured that they would have their current job, but that a job was going to be available for everyone in the plant. We reassured them that it was not a downsizing, but a way of retaining jobs in the face of serious competition. Arthur and the area managers participated in all the meetings. One of the delegates in particular had been very aggressive. He had been with the company for several years, and asked Arthur directly, "Why do I have to believe in this project when many of the promises made in the past were not fulfilled?" Arthur answered with a question. "Do you believe in me personally?" "I believe in what you say, but what the company means may be different," answered the delegate. "But at this moment I am the company, and I assume a personal commitment about the philosophy we are explaining." I had been observing Arthur's increasing involvement as time went by and knew that his experience with similar projects led him to conclude that if a leader believes a project is his own and pursues it with passion, the probability of it being successful is much greater than the probability of failure. Workers want to trust in management's commitment to change. I support the change from the outside, so I had to be careful not to frustrate the sense of ownership among the workers of the company. When I approached Arthur's office and walked through the plant, I noted some physical changes: Dies were behind the machines on page_214 Page 215 shelves, and not in the die store. That contributed to more agile setups. The tools used to

change the machine were organized in a template next to the machine and handy for the operators. Also, the plant seemed to be cleaner. Arthur had launched an aggressive cleaning program. All these things—contributions to start organizing setups and cleanliness in the plant—were done in parallel with the "paper-and-pencil" design of the new manufacturing vision. They were simple physical acts, but they served a purpose: to involve the plant workers with specific matters, and start gaining time while the proposed changes and new concepts were assimilated by the workforce. A clean plant was important for the "mental un-cluttering" feeling it produced in the sections. There was a sense of "search of intelligence" in the personal actions, and a more caring way of doing things. This was critical preparation for the next step, implementing Kanban, since the system is basically visual and the parts can by no means be confused with each other. I saw Arthur on the other side of an assembly bay, so I cut my walk-through short and went to him. "How are you, John?" asked Arthur when I arrived to his office. "I'm okay, but only if you are," I answered in a sarcastic tone. "We are okay, too. We are advancing on the work cell design and are now drawing the first organization charts. There is one cell that cannot be moved from its current location because it is what you call a monument. It is a mechanizing center, the starting point of a product process that has to do with critical aluminum parts. It would be almost impossible to move this center. I'm not saying that we cannot do it, but the cost of relocating the foundation and anchoring devices, besides the movement itself, would be prohibitive. We are visualizing that the project we are starting here would be the initial pilot cell." "Where is the center supplied from?" I asked. "Directly from a stock of parts in aluminum castings sent by a supplier," answered Arthur. "And which operations continue the process?" "Different mechanizing operations in diverse drilling and milling machines follow with fast setup," answered Arthur. "Is the mechanizing center setup time high?" I asked. page_215 Page 216 "Half an hour," answered Arthur. "We have identified one of the machines and we are working on it, since we will produce shorter series suitable for a weekly schedule." "What is the current working situation?" I asked. "The parts manufactured by the mechanizing center," answered Arthur, "are accumulated in boxes when it is finished, according to the batch indicated by production order. From there we proceed, according to the task to be done, by assigning workers to follow mechanizing machines. This is done by the supervisor. The parts batch passes likewise from one machine to the next as a block until the last operation on that part finishes." "And how did you redesign the process?" I asked. "We moved the small machine group closer to the mechanizing center. In turn, we divided the former in two subgroups, basically corresponding to the two subfamilies of parts, with different mechanizing characteristics. And the parts follow through the corresponding subcell." "Did you add machines, Arthur?" "We divided the machines, and reassigned them to each sub-family. We had to add two drilling machines, but their cost was not relevant." "How are you planning to start the process?" I asked. "Well, John, we've thought that the worker managing the mechanizing center, now closer to the other machines, should also manage two drilling machines, while the second worker develops the remaining cycle." "The process is carried out part by part, and this second worker also controls quality." "Did the workers participate in the process redesign?" I asked. "Yes," said Arthur. "Once we had a global idea about the new process, we began sharing a new vision about it with the workers, where the parts 'flowed' instead of working by blocks. We helped them in leveling their work loads in order to divide them equitably among the group. We also worked jointly on new layout alternatives, since now we had to move

machines much closer to the machining center. They suggested several options to facilitate the job." page_216 Page 217

The New Role of the Quality and Maintenance Department "What changes did you make to quality control?" I asked. "Well, John, previously each individual controlled the tolerances on the blueprint for each operation performed by a machine. Now we think that doesn't make sense, so we have decided to control tolerance compliance in the final machine. If we detect a problem, we still don't have more than ten parts between the two machines." "How do you intend to control tolerances?" I asked. "We have designed a new statistical control sheet, with an inclusive concept that incorporates the main controllable features in each part. "The quality department manager had an argument with me, because he said that a 'professional' control could be carried out only if we implanted a variable statistical control sheet. But I thought that even though an attribute control through measurements and a 'pass-do not pass' system provides less information about the tendency than a control variable, it is much more important to have early involvement of workers in the self-control of quality concepts. I also told him that in the second phase, the other concept could be incorporated with proper training." "I think that your quality control manager perceives that he might be losing his job. Have you spoken to him?" I asked. "Yes, John," answered Arthur. "Consistent with the changes we are implementing in the plant, we have developed retraining workshops for indirect support labor. We explained why the current process doesn't work well and prepared them for future work. In the specific case of quality control, we reworked the current process, designing a quality check process involving the staff who currently reports to the Quality Control Department. We call this new process team 'internal quality consulting.' "Basically, the outputs of this process imply giving support—training, analysis, and feedback— to the quality control process developed in each future cell, all managed by the workers. "They are also working on the redefinition of the role of maintenance workers at each cell. Obviously, the team that is designing the cells then passes inputs to the team that is working on the page_217 Page 218 redesign of maintenance activities for the critical machines in each cell. These are the machines that were identified as production bottlenecks." "That is correct, Arthur. There will be machine breakdowns that must be minimized because there is no 'coverage stock' or buffers within the cell, and the time-out of a machine interrupts the whole work-cell operation. Although this production can be recovered in an additional shift, there might be cases of cells that must work three shifts. The 'bottleneck' machines in those cells have our first priority, because we would only have weekends left to recover the production lost due to any machine breakdown." "We are redesigning the machine maintenance process on several fronts, John. First, we are refining the preventive maintenance activities and also redefining the spare part stock as a function of (1) supplier delivery terms and (2) the critical importance of the machine. We are also incorporating elementary maintenance activities into the worker's tasks. For this first cell, part of the pre-launch training includes teaching these topics." "The cleaning program launched in this plant," I added, "will be one of your best allies, Arthur." "Cleaning the machines, touching them to check for overheating, and looking for possible oil leaks," added Arthur, "will get the human-machine interface going much faster." "So then, when are you launching this first cell?" I asked.

"In about 20 days, John. We are now painting the machines in the work cells the same color so that they can be easily identified. A worker suggested this also as a way to encourage team identity and cohesion; as the teams are formed, they will pick their own colors from a list of pre-approved paints." Ensuring Success from the Start "How did you select the team for this first work cell?" I asked Arthur. "John, I followed your advice and made sure that the first cell is a total success. I know that some people still don't agree with the change and will quietly wait to see if the first cell team makes it. So, I am trying to hedge my bets by choosing from each section the page_218 Page 219 best workers who were thrilled to be in the pilot. The cell works with the people, not with the machines. These are open-minded and flexible individuals with a proactive attitude. We have been training them these past couple of weeks." "What you just told me, Arthur, is the key to success," I replied. "When this cell starts, it will not only convince those skeptical workers, but will also serve as positive reinforcement for the organization. It is much easier to show workers the philosophy live with a role model than to explain it on paper." "John, do you think the people will believe they have to work harder when they see the work in this cell?" "No, Arthur. They will see a two-person team working at a normal pace, not fast, but with a continuous rhythm. They will observe that there are no longer dead times waiting for the supervisor to tell them which machine is to be set up next, or times waiting for Quality Control to control a batch of parts, and so on. They will see a 'continuous river of production,' with no funnels and with constant flow. And what is better, the work cell teams will learn to avoid the 'nasty eddies' on their own." Reformulation of Information Systems "One of the topics we haven't talked about, John, is the upgrading of our information systems. I understand that we cannot implement the Kanban system before we have advanced to a certain stage in cell formation, given that Kanban is a system that pulls from cells, not machines. However, during the transition, I have to keep up the production programming in the plant. Through some simple changes in the software scheduling, we have passed from monthly plans to weekly plans in order to manufacture smaller batches, shorten lead times, and reduce stock-in-process. But, for example, how do we consider the future pilot cell in the current MRP?" "Arthur, when we need to program the MRP, the pilot cell will work just like a machine. The production order now involves the cell. There will not be orders for each machine as before, which also economizes many worksheets and controls." page_219 Page 220 "How do I measure productivity now?" asked Arthur. "Before, I measured the output of each individual machine versus the standard to be produced." "Simple," I answered. "Imagine now that the cell is a black box where materials and labor enter, and outputs or parts with added value come out. For each part circulating through the cell, you have to measure only how many were manufactured, how long it took, and with how many labor hours—that is, the time worked by the cell times the amount of workers, which is two. "So, now you have a new standard for the cell, in parts/hour, including internal manipulation, scrap, and cycle time for the whole process." "But now you lose the 'identity' of what is produced by each worker," continued Arthur. "What happens if there is a production problem? Whose fault is it?" "Arthur, the cell functions as a team. If you do not reach the standard by just looking at the work, it will be easy to know who is not doing their task. You must talk with the individual

and see what is happening. Sometimes, I have had to change a layout as suggested by the worker, and the task becomes easier to perform. "Anyhow, there is a learning curve when a cell starts. During the first month, people are absorbing the new work style and developing capabilities. "If for any reason someone does not adapt to working in cells, then the person must be replaced by someone else. This is a red-flag for both the company and the individual. Later on, this issue will be dealt with by the team and the individual member who cannot follow the rest of the team. In all cases, it is important to listen to their rationale and be fair to that person." "Going back to my original question, John, when the cell implementation phase is complete, what software evaluations should be done?" "If the production schedule will be managed by Kanban or finite programming or a mix of both, it is important to consider the use of an integrated software package that takes into account these possibilities. Remember that the essence is the process change and not the software system. For example, it is useless to adopt software with a Kanban module to manage Kanban warehouses in the plant if the page_220 Page 221 staff does not feel the need to continuously reduce the batches of each item produced." I finished the meeting with Arthur and left his office with the intention of grabbing a bite to eat. I was satisfied by the progress, involvement, and level of effort put forward by Arthur and his staff for the Phoenix project. At the entrance of the coffee shop, I ran into Susan, who seemed a bit stressed. We exchanged hellos and sat at separate tables. She probably was working on another deadline and I just didn't want to distract her. However, her demeanor worried me enough to decide to spend the rest of the day at the Commercial and Administration departments, just talking with people to get a feel for how the change plans were coming along. page_221 Page 222

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Page 223 7 Change in the Administration and Commercial Departments The Phoenix project moved to the Administration-Commercial sectors a month after implementation began in the Manufacturing sector. Martin had sent a personal letter to each employee in which he explained the strategic objectives and asked for everybody's help and intellectual support of the change process. Robert and Susan, directors in charge of the Commercial and Administration areas, had jointly appointed a project leader for the processes. An important issue was the assignment of people to the project. Persuading everyone, and especially Susan, that the best people had to be assigned to the redesign of the organization was difficult. "There is a huge workload in the Administration area," said Susan. "We are saturated and have no extra time to devote to other activities." "I understand, Susan," I answered. "But this project cannot be outsourced. Although we can ask outside consultants for help, if our people do not get involved, nobody will implement the changes for us. In no other company where I was involved with these changes have I ever seen it implemented based solely on a report prepared by the consultants." "Anyway, I will have to speak with Martin to find a solution," said Susan.

The next day, Susan met with Martin and Robert. They agreed on the choices for the leader and the representatives from the different Administration sector functions. They also included people page_223 Page 224 from functions that bore a close relationship with the office processes, such as Engineering, which interacted heavily with the Commercial Department. The individuals assigned to Phoenix were asked to make an extraordinary effort to take part in the redesign activities without neglecting their work. This, in practice, meant adding one or two more hours to their daily schedules. In addition, a consultation mechanism was designed to involve more than 50 percent of the employees in the Administration and Commercial sectors of the company. I was surprised that nobody in the company knew what the whole AdministrationCommercial process was; this process had never been documented and had evolved in a piecemeal fashion. How could it be that a big company had never documented on paper their critical processes? With luck, the Systems Department could provide such processes, but they were inevitably out of date. The advance of ISO 9000 in some companies had positively helped correct these deficiencies and standardize documentation. In any case, looking at these matters here with a positive outlook, we could find opportunities within a crisis. A New Approach We took advantage of the virtually nonexistent documentation of Administration and Commercial processes to formally "ask" for the involvement of all company employees. Any problem could become an advantage if we shared problems with the staff and were humble enough to ask them for solutions. After explaining the current processes, the second step of the reengineering process (up to that moment, quite conventional) was attempted: value analysis —pinpointing everything that is not adding value to the company, whether they be functions or information. With the representatives of the different functions who worked at the core of the project, internal "suppliers" and "clients" were identified for each information output. They were asked the concrete question "Are you willing to pay for this information?" so that outdated forms and reports could be eliminated and procedures and tasks could be simplified. page_224 Page 225 Up to that moment, this project might have been a traditional reengineering process for the Administration-Commercial sector. But two features singled out Phoenix as a more ambitious post-reengineering project. The first was that reengineering was "global"—that is, widely generalized throughout the entire company. The second was that the whole company was being converted into a PBO, a process-based organization. Normally, in a traditional reengineering process, the value analysis would have followed the information systems design on a previously "cleaned" workflow. However, the existence of islands within the organization was likely to have persisted, with the ensuing nonproductivity, delivery delays, and information errors. In the case of Phoenix, before going ahead with the redesign of any computer system and after performing the value analysis of each process, the decision to transform the entire organization was made. Following process redesign, an information systems overhaul would be done. Cellular Organization and Information Systems An information system overhaul was necessary because the cell notion of work demanded particular adjustments of computer information systems different from those that are necessary in a function-based organization—that is, not based on processes. This brought about a conversation with Susan, who was also in charge of the Information Systems Department. The meeting took place during the first month of the project, while the survey of the current status of processes was being carried out. Susan wanted to have a

general idea of the future changes to the Systems Department. "What is the basic difference between a system transformation process in conventional reengineering and reengineering that forms work cells, basing the organization on processes?" asked Susan. "Well, basing the organization on processes will mean that approximately 80 percent of the organizational functions will be included in the cells. The other 20 percent of functional sectors will page_225 Page 226 remain centralized and will render services to the work cells. With the organization dismembered into cells, the information relationships between all the functions, suppliers, and internal and external clients will change." "Is a cell a business unit?" asked Susan. "No," I answered. "A business unit is something different. Normally, there are a lot more people in a business unit than in a cell, because one of the most important features of the cell is the high degree of integration, and the visual, face-to-face contact the team members must have. In response to your question, Susan, upon the reorganizations into cells, profound changes will take place in the information interchange between each cell and the internal and external environment. "Do you remember the telecommunications company I told you about in our first meeting?" "Yes," Susan answered. "Well, in that case, it was necessary to design information systems changes in the short run to enable each cell's interaction with the environment to be identified. Looking at the different possibilities here, the first thing I would look at is the list of suppliers. Then we can see what fits this company best." An Example of Functions within the Cells "The basic idea in this telecommunications company," I began, "was to take advantage of large-scale purchases while at the same time maintain each cell's autonomy and competitiveness. For this reason, a group of selected suppliers for the most expensive items had been chosen. "Each work cell was responsible not only for its revenue, but also for keeping its costs down, including working capital costs. When one of the cells needed to buy a technology-derived product to be installed at the client's premises, that cell decided how much to buy and placed that 'order' in the computer system. The system received the orders from the different cells, which were then summarized in a single selected supplier order in which prices and contractual terms had been previously negotiated. page_226 Page 227 "Each cell performed the tracking or follow-up of their order regarding delivery date and quantity requested with the centralized procurement function, which remained in close contact with the supplier. This centralized function received each cell's orders, summarized in the procurement information system, and proceeded to place one order for all requesting cells with the selected preferred supplier. "There was a single warehouse to receive the purchased products. Although each cell was responsible for its own stock, this warehouse was physically centralized, but virtually decentralized from the viewpoint of the procurement information systems management." "Would it work the same way in a factory like ours?" asked Susan. "Probably not exactly in that way," I answered. "Oftentimes, when the order is sent to the supplier (which might respond to a raw material Kanban signal from a factory's cell), the cell and access to the focused Kanban warehouse in the manufacturing cell are indicated. In this way, instead of being sent to the central warehouse, the order is sent directly to the requesting work cell. Therefore, it is necessary to provide some information to the supplier regarding the cell—for example, via the Internet, from the Kanban to the cell—such as the unload dock code and the receiving cell code. This means introducing changes in the

computer system." "Does the cell work as a cost center?" asked Susan. "That's right. In the previous case with the telecommunications company, office cells had been created to work not only as cost centers, but also as benefit centers since the process covered by the cell also contained the Commercial sector, which carried out the cell. In this way, it is possible to get information about the cell's income and costs. Therefore, in the cellsupplier interaction example just given, it is important to keep track of all the products received by the cell. For this purpose, it is necessary to open, through your information system, multiple cost centers, one for each work cell. This could be equated to recording multiple company transactions. "This information is very important for the business manager—the work-cell manager—to keep track of his/her own performance." page_227 Page 228 "What other examples of information exchange between the office cells in the telecommunications company would be useful to us?" asked Susan. "Another useful example would be the inter-cell interaction with other cells or centralized sectors, and the cell's internal interactions. For example, Marketing had remained a centralized sector, which provided support to all the different business cells of the company throughout the organization; this generated a two-way communication between cells and a central area. On the one hand, information collected by an individual in the Commercial function cell when visiting one of his/her clients was transferred to Marketing, which in turn processed that information and appropriate data distributed to all other cells affected by competition. "On the other hand, within a single cell, the system must enable team member synergy. Each individual must be able to have computer access to another individual's process menu, if necessary, to help unblock a temporary bottleneck." "What do you suggest, John?" asked Susan, "Buying a new integrated system that allows us to do that?" "I think that the important thing now is to be practical and act with prudence," I answered. "It is necessary to move toward getting a new software, once we know pretty well where we want to go in terms of functionality. The design team, which is working on this now, should be defining the system needs for the short run, the minimum necessary elements for the work cell to get going. And, for the longer run, defining the system needs to meet more ambitious functional aims, maybe with a new ERP system." "Wouldn't this amount to a double implementation?" asked Susan. "First a modified system, and then a new one?" "In my opinion, Susan, the greater advantage in all that we are projecting comes from the increased productivity that this work team will have, and the corporate sense that each work cell will have, by operating as independent factories once they master the whole process. Delaying the installation of the cell concept by joining an organizational change with another computer system at the same time doesn't seem logical to me." page_228 Page 229 "Apart from this, speeding up the work-cell's start-up allows team members within each cell to re-evaluate their individual cell's functional needs, and therefore 'live' the work inside the cell; in other words, it will give the teams the opportunity to self-organize, within the parameters of the PBO." Activity-Based Costing and Cellular Organization: A Simpler Way "Talking about parallel change activities, John, do you think it is reasonable to implement an ABC system?" asked Susan. "Yes, I agree with that," I answered, "because every future cell business manager will need

to know his/her true costs (activity-based costing) and because now, with a work-cell organization, implementing ABC becomes simpler. What I'm thinking in this case, Susan, is that upon implementing a process-based organization, a few sectors are likely to remain out of the program. "Let's suppose that we want to pay for a certain product for a certain client. Under traditional costing, we should sum up the factory variable costs, distribute the factory fixed costs prorates, and consider the overheads (administration, commercial, finance, legal, etc.) by distributing that pro-rated cost. "In a cell organization, most of the old general and administrative overheads are already inside the cell. If cells have already been formed in the factory, they have already absorbed most of the old indirect Maintenance, Programming, and Quality sector costs. We not only have this advantage, but also that total product costing will not be done for 100 machines, but rather only for 10 cells, to give an idea of the proportion. "The same is true with the office cells: if we are costing a product and/or a client, we have to cost the cell having that client and/or product in charge. This cell has already integrated different functions that in the conventional organization were separate. The only thing left to do is to recalculate what percentage of its resources and time were devoted by the work cell to that client and/or product. Lastly, it is necessary to add the cost of the centralized sectors that have not been cellularized ." page_229 Page 230 "That's to say," Susan answered, "that calculating the cost of a product and a client, once our cell organization is redefined through activity-based costing, would not be as complex as it is today. Right?" "That's exactly right, Susan. It would be the summing up of all the factory cell costs for that product plus the cost of the office cell managing it and the correct allotment of activity costs of the centralized sectors or indirect sectors—which, by the way, have been significantly reduced in relation to the old traditional organization." "Deepening your rationale," said Susan, "I was thinking that costing the product in the example for each factory cell is not complicated. In the factory cell, time and resources for each product passing through the cell are much more easily recorded.… But how do you do that in an office cell that is much less standardized than a factory cell, considering that the Administration-Commercial activity is messier and sometimes is not as sequential as in a factory?" "The important thing is to identify the drivers that quantify the development of activities within the cell," I answered. "One of the questions is, 'How long did people in the cell devote to a specific client and/or product?' But this is much easier to define in an environment where people are focused exclusively on certain clients and products than on the entire company's product line and client base. In a traditional organization, for example, in a function such as "order input," any product and client could be included. The criteria is common sense. In fact, the most important thing in an ABC project is common sense—using wisely the information that is available. "Going back to the case of surveying how much time the cell should devote to a product and client, you can ascertain this information by asking each person in the cell how much time they devote to certain products and clients. You can then try to match by looking at the number of computer lines they used in the transactions per client, for example, to see if they match the person's assessment. That's only applying the traditional methodology of activitybased costing to the work cell." "Seems like the process-based organization greatly simplifies the process of obtaining activity costs," Susan said. page_230 Page 231 "Undoubtedly," I answered. "I would say that some of the things companies are doing nowadays are ridiculous. They calculate their activity and process costs, but are organized functionally where there is little control over the activities and processes that cut across

functional silos; in other words, they are fixing the cost of horizontal processes, but they are organized vertically. The final objective of an activity-based costing system is to provide that information as operational feedback to the company management. Suppose that in a functional organization, management has determined that a given process is inefficient. Who is responsible for the excessive cost? And who will be responsible for its improvement? Because the parts of that process are in different functions and are under different bosses, it is virtually impossible to assign responsibility and accountability. That's exactly the same nonsense done by those companies that reengineer their horizontal processes and leave the same vertical organizational blocks undisturbed, for whatever reason. It inevitably involves a power struggle in managerial ranks." "All this seems to make sense," Susan said. "Why do you think that no further advances have been made in the world with the process-based organization?" "I have no doubt that it is because of the huge resistance to change offered by the company's middle and upper layers." "The upper layers, and not the lower ones?" asked Susan. "Of course," I said. "People working on the most operative aspects of the company normally become very excited with the concept. For them, it means getting away from the routine and coming into a view and sense of belonging in the company. "For the people in managing positions who have delegated and motivated their staff, the change is not meaningful or even threatening to their future role. But the more vertical the organization is and the more arrogant the person, the wider the distance between the current role and the future role." "One last question, John, to finish with the costing topic. I can see that, in a manufacturing company like ours, an office cell obtains its products from the factory that, in turn, is a set of manufacturing work cells. But in a service company such as the telecommunications one that you spoke about earlier, it is clear that there page_231 Page 232 is a greater integration of functions within the cells, almost as if they were mini companies. Have you had a similar thing happen in the case of a manufacturing company?" "Yes," I answered, "in a technology manufacturing company. Approximately 20 cells were formed in the Administration-Commercial sector—catering to different types of clients. This company had an extensive manufacturing operation, and the office cells were related to it— something similar to what you are trying to do in this company. "However, in this technology manufacturing company, they had decided to produce a new product with a special manufacturing process, impossible to be produced with the machines they had at the time. For that reason, they decided to assemble a small factory devoted to this product, like a pilot. "The decision was made that a new office cell should take care of this product and that the business manager conducted both the Administration and Commercial management, as well as the Manufacturing management." "Were the clients for this new product buying products in the other cells?" asked Susan. "That's correct," I answered. "But if the new product were incorporated to the other cells, the relevant business managers would have seen it as something marginal and might not have devoted themselves exclusively to that product, wholeheartedly." Sharing Changes with the Rest of the Organization While I was speaking with Susan, Robert approached us. "I am worried," he said. "We started the design of the cells just a few weeks ago, and there are already people manipulating future expectations. For example, there is already speculation as to who can be future business manager of each cell." "This is quite normal," I said to Robert. "The most capable people, who are today in middlemanagement positions, see that there is change underway and want to make sure they are well positioned in the end. This is not what I would really be worried about now, but rather whether the choice is right or wrong, or page_232

Page 233 even worse, that there won't be people in the organization capable enough to cover those key positions." "Could this really happen?" asked Susan. "This shouldn't happen, but it is possible," I answered. "A wrong choice could result from the company's misunderstanding of the direction or the ultimate objective of this change, which is to create an intelligent organization in the broadest sense of the word. "Each cell is an intelligent organization in itself and requires human intellect to manage it. Managers need to be aware of what happens inside a person and to that person within the team that makes up the work cell, and to be sensitive and generous toward the employees who report to them. It's not easy to find these people, but these people do exist." "Do organizations sometimes choose other types of people to serve as leaders of the office cells?" Robert asked. "That happens sometimes, but it is not good, Robert," I answered. "They might simply not choose the best qualified leaders for a cell. As to why that happens, I'll leave it to your imagination." "And how can this type of mistake be avoided?" asked Susan. "The wrong choice of manager can cause the cell to fail," I answered. "I would say that this is the most critical choice of the change process, Susan. To minimize the likelihood of mistakes in this regard, it is essential to define not only the technical functions to be fulfilled by the business manager of a cell but also his/her human profile, and to contrast this with the reality of each candidate." "How can we manage people's current expectations?" Robert asked. I answered, "Once the total number of cells is defined in terms of functional resources and the market they will serve, it is important that all the new business managers be appointed immediately." "Why the rush to appoint business managers, John?" asked Susan. "Look, Susan, assuming that a good choice has been made and all the precautions I told you about have been taken, quickly identifying the new business managers reduces anxiety." page_233 Page 234 "On the other hand, the person selected as a business manager makes the process his or her own, taking charge in a positive way. By doing this, the business manager of each cell can take an active part in refining the work processes more enthusiastically than before the assignment." "And what about the assignment of individuals to each business manager to start the cell?" asked Susan. "In my opinion, and contrary to the philosophy of choosing the business managers fast, the company should not rush into that step," I answered. "It is important to consider well in advance the required training/retraining before implementation." "In addition," Robert said, "I can imagine that once the business manager and the members of each cell have been identified, if the entire change has not happened yet, there is a risk of hurting the company. The future members of each cell will no longer be thinking about their current responsibilities, but positioning themselves for the future." "That's right," I answered. "Also, people will attempt to be closer to their future boss than to their current one. This might bring about a feeling of 'schizophrenia' and afflictive emotions within the organization. That's the reason why this issue has to be carefully contained, and creatively and dynamically managed," I continued. "What's critical during this period, if left unattended, is the surge and emergence of negative team emotions that might be hard to recover from. The new business manager in each cell needs to be well aware of the emotional implications such as team emotional triggers and hot buttons, emotional contagion, synchrony and resonance during cell formation. They need to be attentive to and promote the emergence of positive collective acts of emotional display triggered by emotional contagion." Both Susan and Robert were following my words with particular interest in factors that

affected team emotion. When I had met with each of them separately, I had discussed my findings on team emotion and its effect on perceived safety for interpersonal risk-taking within and across work cells. They understood from their own managerial experience the effects of emotions in groups, but they had never addressed them or even knew how to handle page_234 Page 235 emotions for an entire group. Both of them knew I was going to present my findings about team emotion toward the end of the project and that I would provide the tools to effectively interpret team emotions just when they will be needed, or as they say in the trade, "just-intime and just-enough." I did not want them experimenting with foreign ideas before Phoenix was past the redesign phase nor saturate them with information they didn't need to use right away. Sometimes education and training during organizational redesign is best disclosed and introduced gradually. The change process had reached a critical point where my influence was absolutely necessary at each step to make sure the work team was progressing with the right spirit. At the same time, my visibility had to diminish so that leadership emerged in all quarters of the company. As a change agent, these were dangerous waters to cross. This challenge required my best perceptive-intuitive skills and would need numerous coaching and informal redirecting sessions behind closed doors with individuals (everyone was affected, but I concentrated mostly on softly steering managers and directors; the rest would follow). A True Team-Based Organization I decided to attend one of the workshops of the design team. A few weeks before, the number of cells and the general functions replicated in each of them had already been defined for the entire company. Each Administration-Commercial cell had been given the functions of order input, credit, engineering in coordination with the factory, invoicing, shipping, and collection management. Furthermore, each cell had also been allocated with a dedicated salesperson. The Phoenix project team decided that the most convenient way to divide the cells was by geographical area. Each of them had been given a market area with specific clients and could be provided with any product they needed, whether machinery or spare parts. The branches worked as points-of-sale ; they received the clients' orders and kept a personalized relationship with them, but page_235 Page 236 the rest of the Administration-Commercial process was performed at headquarters. Now the spare part dealers needed to be transformed into points-of-sale as well. I remember taking part in one of the work design workshops where people questioned the wisdom of including the Engineering function within each cell. "I guess that the Engineering function is inconsistent with the rest of the Commercial functions to be performed within the cell," said a member of the analysis team who worked in the old Engineering Department. "But the process of satisfying all the clients' orders for the entire company must unavoidably touch the Engineering function," a Commercial area colleague answered. "We have already explained the problems we have encountered because the organization was separated into functional islands. Clients' orders with special requirements were taken by the Commercial Department, and then sent to the Engineering Department to determine their cost for the manufacture of special elements to be budgeted," he added. "The amount of time between the point of order and the point where Engineering processed the estimates and sent them back was excessive. In the meantime, the client was waiting. When the quotation came back from Engineering, we found that it had been excessively priced compared to market, which disqualified us in relation to the competition. Then we had to revisit the order again with the Engineering Department, and the entire process got out of hand."

"At any rate, this meant very long waiting times for the client, and the renegotiation of proposals jeopardizes the relationship with the client." "For this reason, I think that including the Engineering function within the cell in our case will help decrease the client's lead time and allow us to offer, from the very beginning, our best cost estimates as to service and products." "When the Engineering employee works in the same core structure as the business employee, interaction with the client improves and more-appropriate solutions can be offered at a reasonable cost. The Engineering employee is also aware of the page_236 Page 237 functions performed by the factory's standard lathe and the cost differential implied by adding functions; they can make this calculation easily and very quickly. But determining when the Engineering employee should be involved should be decided on a case-by-case basis; there is no pat answer for all cases. The client will usually tell us what the best course of action is in each case: when it is convenient for the Engineering employee to accompany the Commercial employee to a client visit, or when it is convenient for the Engineering employee to stay back in the office, researching choices for the client." One of the Engineering employees had a question. "What if there is a work overload? Before, your colleagues would help you if you had a heavy workload. Our boss distributed the work evenly. If this is not going to happen from now on, and if we have to make technical consultations in addition to our workload, who is going to help?" "That's a fair question … but it's another work concept," I answered, jumping into the conversation. "It is true that the Engineering employee, while working within the cell, will have to survive the work peaks and will no longer have their colleagues to help … that is, until others are trained to help. "At the beginning, the work peak will cause a bottleneck for the entire cell. But this should happen only at the initial stages of change. The team members in every cell should strategize and plan their work so that no one becomes a bottleneck to the cell; the only solution for this is training. "What other companies have done is to gradually train one or more team members within the cell, those with the most aptitude for the task, in order to back one another up." "But is it possible that people with such inconsistent functions would be able to help each other?" the Engineering employee asked. "It is possible as long as two factors are in place: time and intelligence," I answered. "The first factor needs no explanation; the second means finding a way in which one person can help another person performing a more sophisticated function. "Let me give you a manufacturing example. In the factory, there are machine processes that can become bottlenecks. Before page_237 Page 238 buying another machine to reinforce the factory cell, the attempt should be to free the machine causing the bottleneck by removing all extraneous tasks that are not part of its core activity. For example, when it is necessary to introduce a change in the machine causing the bottleneck, it would be interesting to see the die process simplified or to see the setup be more agile, in order to facilitate an operator in the cell helping the person in charge of the bottleneck process. Maintaining the machine allows workers to better utilize the productive times of the bottlenecking machine as well. "In the case of an office cell, a similar solution is possible. Let's assume that the bottlenecking process is Engineering; it is the first function that gets saturated upon receiving a surplus of clients' orders. Beyond the gradual cross-training that some members of the cell must go through, we could repeat the example of the factory. Some Engineering functions, which are not directly related to its core task—such as entering the client's technical survey standard form in the system—can be performed by others, freeing up the Engineering employee for the more essential tasks. But this process must not be left to chance; the training plan for the cell must be focused and very precise. The individuals who

help, how they help, and to whom they offer help must be clearly identified within each cell. At some point, the cell team members' capacity to perform all the functions will peak; the timing of this depends mainly on the complexity of the technical functions incorporated in the cell," I explained. "And what about access to technical know-how that the Engineering employee had with the staff in its former sector; isn't that lost as well?" asked another Engineering employee. "This is an issue that we have successfully resolved at other companies by creating an inter-cell consultation scheme—a kind of consulting/matrix organization. For example, in the Engineering employee's case, a possible approach is to informally connect the engineering employees from each cell by forming communities of practice, or forums where they can discuss technical solutions and state-of-the-art technology outside their day-to-day tasks. "The technological issue is simpler to address. At another company, a consultations database of frequently asked questions was page_238 Page 239 established, where each cell member in the Engineering function could post questions and comments for the purpose of exchanging opinions with other individuals in the same function, but in different cells," I explained in more detail. "The human factor must not be underestimated with regard to the importance of communicating at regular 'face-to-face' meetings and openly exchanging opinions. You must allow for the emerging of team emotion reflected in a collective act of emotional display. "In some situations I experienced, the business managers of different cells asked a consultation group (a virtual team of functional specialists from different cells) to solve a specific problem, such as the joint choice of a CAD system to be used by each company cell." "Wait a minute. Is it possible, then," asked an employee who had participated in the workshop for the redesign of the Commercial sector, "for matrix groups to exist superimposed on the formal cell team?" "Oh yes, absolutely," I replied emphatically. "It is perfectly possible and even necessary in some companies. This does not mean that the new work process is in any way altered in the affected cells. The team members are still primarily responsible for the efficiency of the process within the cell, responding to the business manager's directions. But to address functional impact issues that affect all, it is good practice to create consultation groups with specialists belonging to different cells." The Chess Board of the New Organization: Selection of the Cell Managers Pieces of information about the vision of the new organization had been gradually distributed to all workers. Martin had attended meetings where reports from the findings of the Phoenix work teams were presented by employees to their colleagues. Some human-factor topics had come up repeatedly, and Martin took an active part in addressing them. Martin had asked me about one situation before going on. The topic he addressed was the choice of a cell manager: An individual who had been proposed by Robert page_239 Page 240 in Martin's eyes did not comply with the human requirements of the position. "What do you do in these cases?" asked Martin. "Klaus told me that the candidate chosen by Robert to head one of the cells was a person resisted by his colleagues despite his high intelligence. He has a go-getter, assertive, and results-oriented type of personality that I really appreciate." "Martin, did Klaus tell you how his colleagues would react should this person be the head of the cell?" I asked, knowing well that Klaus had indeed approached Martin on this issue. "Yes, John, he told me that people would end up accepting the company's decision, but most of them would be frustrated with their future jobs."

"Martin, I have another question: Did you evaluate with Klaus the other alternative functions this person could perform? Can someone else take his place heading that cell?" "Yes, John. This person comes from the Commercial sector, as you well know. I thought that instead of being the business manager of a cell, he could occupy the position of marketing manager, which is one of the sectors that remain centralized. But that is the exact same position I thought Robert could occupy, and I talked about it with Robert as his possible future job. Once the last cell is implemented, Robert will no longer be the Commercial manager. He was to become the Marketing manager, a position he is well suited to occupy, giving strategic support to all the cells on pricing policies and our competitive situation in the market. But now I cannot see a clean-cut solution to this problem." "I understand your dilemma, Martin. I think it is reasonable to assume that you do not want to lose that person. But appointing as cell business manager an individual who is not qualified is inviting failure. And I would never advise that. I think that the best you can do is to talk candidly with that person and tell him that you hold him in high esteem, but for the time being, you cannot appoint him as cell business manager. Tell him that he has to improve his leadership style and that you would be happy to work with him on that, and perhaps if everything goes well, at the right time, you would be happy to promote him." "In the meantime, what role can he play?" asked Martin. page_240 Page 241 "You probably know the answer to that better than I, but he could possibly be appointed as a salesperson in one of the work cells. After all, that is his natural talent and that is his current function," I replied. "Honestly, Martin, I do not think this person is ready to resign. But how you put forward the issue to him will be very important. After all, you are not telling him that he will earn less than he does now. On the contrary, you are offering him an advancement option. As an alternative, if you think you might lose this person, offer a more immediate opportunity by appointing him as the business manager for one of the smaller cells—for example, the exports cell—while you follow up his leadership development." I tried to elaborate. "With regard to the other topic I asked you earlier, do you currently have in your management team enough people with the right profile to fill all the work cell business manager positions?" I asked, this time really not knowing the answer. "I believe I do, John," Martin answered. "Something odd has happened in this regard, though. In some cases, the people who emerge as possible cell leaders are not the most visible ones. I had to get involved personally with this issue because I got the impression that the individuals proposed by the managers were not the most suitable ones according to the new leadership profile." "What you say is quite normal, Martin. Here the company's work culture until now encouraged individuality and competition, but things are changing with work cells and PBO. Now we are trying to stimulate team work and openness. Maybe the faces that are in plain sight are not the 'most suitable' ones for the new culture, but the human spirit is such that given the right conditions, any person can transform themselves. Human beings are flexible and can learn many things. I would say that in 80 percent of the cases, people can learn to be leaders. Also, potential candidates can exist in the second or third tier of the company that you might have overlooked. That is the foundation to your succession plan." "There is something that worries me, John, and that is how to deal with managers in this context of change, because in many cases, the traditional functions will disappear and so will management jobs at that level." page_241 Page 242 "I understand your concern, Martin. But the answer changes from one organization to another. "There are many factors to consider: the company culture, how urgent the change is, and the obvious emotional factors that come into play. When an organization is based on processes, we are basically speaking about the core

processes —the essential processes to sustain the business. Organizations are built around these processes, and each process is a cell with its members and a leader, which we have been calling a business manager. It no longer makes sense to speak about a traditional manager of an operating function. Not all processes and work cells are of equal weight; those managers with more leadership qualities and experience normally become business managers in cells that either serve the most important clients or have more strategic value to the company. In other words differentiation is based on leadership qualities and competence, leadership rather than titles and how many people they have under them. Another option was to assign them to manage a sector that remained centralized, as could be Robert's case. In other companies I consulted, the culture was such that a less dramatic transition to cells was devised where the functional manager remained in place, having all cells reporting to them. In this type of transition, the traditional managerial positions remain the same for a period of time. In other projects I have seen, the organization chart I have just mentioned was the final one. The managers remain, the cells report directly to them as part of the matrix, and there are no business managers. "Another possibility that some companies have adopted is that the cells have a leader, but not a business manager. The operating issues related to the Administration sector of the cell are solved by the Administration manager, and the commercial issues are solved by the Commercial manager or the Sales manager. This solution has been adopted by some small companies, but the basics of PBO are the same—cells that support the entire Sales and Manufacturing processes, working as a mini-company." "What about here, Martin? Have you talked to each of the managers about this topic?" "Yes, John. In my opinion, I would not like to get into a temporary scheme like the one you mention, because it would only page_242 Page 243 delay the resolution of the issue. I have already solved Robert's problem. Klaus's sector, Human Resources, will not be cellularized at this stage. Arthur will continue as the head of the factory cells. Peter's sector will remain centralized and will provide support staff to the cells, including their cash-flow. Only Susan remains unassigned. I was thinking of speaking with her about systems management, which has been redefined as a strategic support sector to all the cells," commented Martin proudly. "I think that what you have done is very reasonable, Martin," I added. "You have completed the most important step in relation to management assignments. Once you have a clear vision of the new organization and each of the selected managers fits the requirements of the cell, all that remains is to discuss the new possibilities that the organization can offer." A Business Made up of Mini-Businesses: Tangible Benefits "I would like to discuss something with you, John," said Martin. "The cell scheme that the work team prepared for us—I have no doubts that the factory cells are on the right track. Furthermore, a few days ago I saw the first factory pilot cell in action and I was able to appreciate many of the things we have been talking about. I know that Arthur's plan is very ambitious, but after this first cell, the rest follows a very strict schedule. As for the office cells design, I am not as confident. Can you tell me what their status is?" "Of course. The preparation of the final details is practically done," I replied, "and after these months of hard work, the first pilot cell is going to be launched to test a number of things with it. As you know, Martin, the functions that have been redefined for each mini-company are a mixture of the functions from the Commercial, Administration, and Logistics sectors. The process that supports each of them includes activities such as incoming orders, credit checks, engineering, and coordination with the factory, shipping, and accounts receivable. And for each cell, a geographical market sector has been defined with identified clients who can consume machines as well as spare parts." page_243 Page 244

"Do you think that with this change we will be in a position to meet our strategic objective: taking care of more customized machine orders and doing it with a lower cost and in a shorter time than the competition?" Martin asked. "Yes, Martin. I am quite confident that we are going in the right direction. If this were a ship, we could be off a few degrees, but I have no doubt we are generally on-course. We are using techniques that create the greatest impact with minimal cost—no doubts about that. "To give you some numbers, we could analyze the impact in each department of the company. In the factory, for example, the allocation of the numbers of people to each defined cell was the topic of discussion last month. This was done using different criteria from the traditional labor allocation per-machine. We are planning, for a first stage, an increase in productivity of about 20 percent. This is only the first step, since there is a focused automation plan under way within each cell that allows an estimated additional increase in productivity. The combination of the work in the cell with material being processed 'piece to piece' shortens the factory delivery dates," I continued. "Reducing manufacturing lots will also have an impact on delivery dates, which today allow us to only develop weekly schedules rather than monthly schedules. This is possible only because we shortened the change-times in critical factory machine setup. As a consequence, we will have four times less stock in process than in the current situation, and the factory delivery date will be set initially to be no longer than 15 days. "All this concerns just the delivery of numerical control lathes. For the spare parts, with our Kanban inventory control design, we can achieve 100-percent service and deliver in 24 hours. It works as we discussed, like a supermarket at the end of the manufacturing process where internal signals are sent to the cells to indicate that a product 'shelf' is empty. "Also, with regard to changes in the Administration and Logistics sectors, having the work done at the cell is going to reduce the lead time of the administration and commercial processes at least by 50 percent. From the current 15 days, we are going to reach a 5-day turnaround. We will customize the interface to better match page_244 Page 245 each client relationship, the difference being that now we are going to have a team that will manage the whole process with that client. This in turn will create a strong business sense within the work cell. "The combination of the cells working in the factory and the cell related to the Administration office will allow the reduction of order-delivery cycles for a machine from the current 95 days to approximately 20 to 25 days for the numerical control lathes. And that's only a starting point: Fewer days can be expected as the process matures within the cell. "In the case of the spare parts, the distribution logistics in dispersed geographical areas is going to be made through Kanban warehouses located at the distributors' premises, which are re-supplied by the Kanban situated at the factory's central warehouse. This ensures 100 percent service to clients. The calculation of the Kanban indicates that with 40 percent less stock, we can have a much better level of services than the current one and delivery in 24 hours maximum. In short, Martin, your service will improve substantially and there will be savings along the entire logistics chain, both in productivity and stock levels," I continued. "I think that this is not the end of the improvements road, but rather only the beginning. As I told you before, the company remains physically prepared to continue improving on its entire productive infrastructure. For example, each factory cell enters a continual improvement cycle regarding production and quality. Beyond its physical characteristics, the factory cell is a continuous quality circle, because the people who are acquainted with the process are continually working in it within the team. "The same is true of the office cells. Each of them must meet the invoicing and service goals we set for them, with the same business sense we apply to the overall company view of Manufacturing and Sales. This is a practical way of creating an intelligent organization in the company, a natural organization based on processes contained in work cells. "The goals set at the company level for customer service, delivery times, working capital, and costs control now represent tangible things for the people in the work cells. By putting these elements in context for each cell (office and factory), the goals suddenly make sense to them. Conversely, if today we ask a machine

page_245 Page 246 operator or an office employee who works as 'islands' to perform against these goals, they cannot answer." Logistics through Kanban "Each mini-factory and mini-company?" I continued, "knows exactly how to make a valuable contribution to that overall company goal. For example, a factory cell can reduce the set-up times even more to make ever smaller lots more efficiently; if deliveries are being made to a Kanban warehouse, they can ensure a smaller quantity of each product (reduce in-process stock), but still provide the same level of availability at the Kanban supermarket. "Another example would be for an office cell to make the Administration-Commercial flow within the cell more efficient by proposing specific modifications to the computer systems. The most important thing now, Martin, is to be consistent and to persist in the way the company needs to operate. I believe that the road is clear, and this clarity is what allows you to make decisions more easily—for example, to decide what computer system is the most convenient to adopt." "What about the spare parts issue?" asked Martin. "For example, if we took the cell that services the southeast area of the country, this area has two of our distributors, right? Each of them has a Kanban, with the quantities of spare parts determined by a joint agreement with the distributor. But who manages this Kanban?" "In the process design for the branch, the branch is in charge of taking clients' orders and transferring them via satellite communication to the office cell. The office cell in turn completes the administration and engineering management for the numeric control machines, our main product. In the case of spare parts, it is slightly different; these are delivered directly from the Kanban to the distributor. When the Kanban for a given spare part is lowered to a specific level, re-supply is electronically requested to the factory from the Kanban located at the central warehouse. This last process is done automatically, without the intervention of the office cell. Precisely, one of the advantages of Kanban is this automatic reaction, once programmed for each item and each location, the reorder lot size, and the order point of the Kanban for that item. page_246 Page 247 "It could also happen that an item is located at the central warehouse Kanban in order to respond with more flexibility to the distributors' orders. In this case, the order for the endclient, taken at the distributors' premises, is transmitted electronically to the shipping department related to the central Kanban, which processes the orders in a first-in first-out sequence. When the level of a spare part for the centralized Kanban goes below the reorder point, the signal is transmitted to the cell at the factory that assembles that spare part. These cells, in turn, work with parts coming from the Kanban that is placed at the end of the mechanization cells." "How does the computer system support all this change, John?" asked Martin. Clever Output Manufacturing: A Step Beyond MRP and Bottleneck Management "All right, Martin," I said, "As you know, we have made two systems plans, one short term and the other middle term. "The short-term systems plan only allows for the cell organization to quickly support its basic processing needs. In the middle term, we envision greater sophistication in system functionality, but always keeping the process-based organization as the guiding focus. "This means that for the short term, we are making adaptations to retool the MRP that is already in place to consider the cell as a 'big machine' and a cost center. The routing of the products is now made through cells and not machines. We are also modifying the report system so that the statistics are made by cells and not by machine. "The supply master plan, at the level of raw materials, is still being managed through the

MRP in order to give supply horizons to our suppliers. But the tactical part of the supply, the 'what,' and the punctual part of the supply, the 'when,' is something you are going to manage with visual Kanban systems of raw material orders. "Likewise, for the programming itself in the factory, we have adopted a mixed system. Everything concerning spare parts, on the page_247 Page 248 one hand, and a number of pieces that we have identified as basic or common to the different products are what we are going to manage in relation to the stock by means of the Kanbans. These will be visual and will pull out of the different cells for their production as the aisle gets empty. "A number of pieces that we have identified as special order are managed on-demand according to client's requests. These special pieces also circulate through the plant cells, but you are not going to manage them with the Kanban because they are special. What we are doing is enabling the current MRP system to manage these pieces in terms of bottlenecks, but relating them to the cell concept," I added. "Is this something similar to Bottleneck Management?" Martin asked. "In my opinion this is a superior concept. You will not find the concept of cells in Bottleneck Management. Bottleneck Management is a system of plant programming. When you introduce the notion of 'work cell,' you are not only introducing a structural and human concept for an internal increase of productivity, but you are also simplifying the programming of manufacturing. I call this notion clever output manufacturing to differentiate it from the Bottleneck Management. This causes production to be synchronized at the speed of a 'bottleneck cell.' "This is a much simpler problem. Imagine that in this company, the bottleneck cell is the one that produces parts that are manufactured on-demand. In your case, it is the mechanization cell—the one that manufactures the heads for lathes and other parts with considerable volume. One of these special parts goes through seven cells, on average; one of these—the system bottleneck cell—works on the edge of saturation. "We have introduced modifications to the MRP system so that the entire set of cells for producing special parts manufactures at the 'pace' of the bottleneck cell. "This means three work-shifts are needed in the bottleneck cell for a specific part mix, and two work-shifts or fewer in some of the other cells. The production sequence takes into account set-up grouping guidelines: 'Families of parts' are chosen so that they are sequenced one after the other to allow a reduction in change times page_248 Page 249 in the bottleneck cells. This is critical because any minute saved in this cell has an impact on the total production. On the other hand, there is a visual monitoring on the stock behind the bottleneck cell that in the electric engine factory was called queue control , which was predetermined. "Any problem in real life (machine breakdown, absenteeism, etc.) can cause a certain amount of permitted stock to exceed the limit on the stock behind the bottleneck cell. In other words, the input to the bottleneck cell is accumulating faster than the cell can process it. This means that this cell is not producing as it should. This is a visual signal to take two possible corrective actions: (1) to solve the problem of this cell as soon as possible and (2) to set the pace of the remaining cells according to the processing capacity of the bottleneck cell—that is, not to produce in excess. All this, as we discussed earlier, is applicable only to special parts made on-demand, which are excluded from the Kanban system." Martin was beginning to appreciate the complexity of clever output manufacturing for special parts on-demand. "The modification made to the MRP system so that it can manage production of special parts at the same pace of the bottleneck cell, what you called clever output manufacturing , is also related to the current methods of finite scheduling, isn't it?" Martin asked.

"Yes, Martin. The goal of both my application of clever output manufacturing and finite scheduling methods is to reduce stocks in-process and to shorten lead times. However, finite scheduling software applications are based on the theory of restriction. The essential philosophical difference between the two methods is that the basic model for making the entire production advance at the bottleneck pace is much simpler to develop when you work with 10 cells and not with 100 machines. In addition to that simplifying factor, with Clever Output Manufacturing working with cells instead of machines, you add the human intelligence element of continual improvement of processes, systems resource allocation, communication, etc., through the cell." Martin caught the point I was making and quickly replied. "Interesting approach, John. But why do you think that something so simple, which seems to be common sense, has not yet been more widely adopted?" asked Martin with a smile. page_249 Page 250 I saw an opportunity to educate and I took it. We had moved out of the meeting room into a public area filled with cubicles and smaller offices, where busy administrators moved around in predictable patterns. Several managers were standing around us within earshot of our conversation and were following our every word. Martin liked to create pressure by moving his contenders into the public eye; he did this without thinking. I was not a contender, and I planned on mentioning this to him in our next one-on-one meeting behind closed doors, but now I was against the wall, literally pinned down by a half-dozen expectant pair of ears and Martin's healthy dose of skepticism. "Well, you see Martin, unlike your management team, some production managers are still much more comfortable having a contractor install a finite scheduling software and demanding results from the Planning Department; it is a less-risky career move. On the other hand, leaders like you have here are willing to do the right thing: starting a considerable technological and human change, such as the creation of cells based on processes. It is not an easy way out, but it is the only one that in the end will ensure the productivity gains that this company needs to survive and compete in a global economy. And I know you know this, Martin, but I'll say it again: This is the only way to engage everyone's full potential, incorporating the ultimate software—the human mind and the concept of continuous improvement. The rest naturally follows." A New Look at Investments "What mid-term change is Arthur thinking about for the computer systems in the factory?" asked Martin. "We are thinking of introducing a system change at the factory in the second round, once all the work procedures in the cells are consolidated and the staff can manage the Kanban correctly. We are going to introduce electronic data transmission at the raw material Kanban, which connects us with the suppliers. We will also introduce computer terminals at each cell so that the workers feed data into the report system, along with production data and statistic control data on process performance. This information in page_250 Page 251 turn provides input to the quality control system. Changes will also be introduced so that cell team members can check the stock of spare parts for maintenance tasks that the cell will eventually perform. Once the workers are used to the new operating practices, the idea is to decentralize several information-processing tasks to each cell as a gradual change. "In my opinion, once the basic changes have been implanted, and the organization has been aligned with the critical business processes, any technological improvement after that enhances the change. It would be almost impossible to detail the number of things at a technical level that can be added then to the cells. But as we were saying at the beginning of the project, it is important to incorporate, as a priority, the tool that involves—at the lowest possible cost, and in the shortest term—people, processes, and technology," I commented. "John, when you speak about prioritizing, just give me a concrete example of what you are

thinking would work here," Martin requested. "I think that some changes impact the bottom line in a much more direct way than others and are easier to implement. I would prioritize changes that require less investment of money and resources with the highest pay-back; in other words, let's pick the 'low-hanging fruits.' For example, after making all the improvements possible in the factory related to administrative and organizational setup, then we should think of technological improvements. Any technological investment that reduces machine set-up times, assuming that the right training was done, allows smaller lots and less stock in-process almost overnight. When technological automation improvements are done on-demand and are always designed to take advantage of the work in a cell, it also produces instantaneous results, but it is necessary that these changes be carried out by involving the cell teams and sharing with them the responsibility and accountability for its success. "This represents a significant philosophical difference with, for example, an investment in the robotic automation of a warehouse. That is an expensive hit-or-miss proposition, especially if no one previously considered eliminating the warehouse as a stock point entirely. Again, I think it is much more comfortable for a company page_251 Page 252 manager to automate a warehouse than introduce changes in the processes, workflow, and human change to eliminate the warehouse." "Okay, John. I see your point," said Martin. "I also know that sometimes companies—mainly the people on their boards of directors—do not sufficiently understand the advantages and disadvantages of these change notions, and as a result, don't have enough passion to support a transformation effort of this magnitude. But sometimes, this transformation is the only competitive edge that a company has with local competitors on products and with cheaper overseas labor that threatens our entire industry at national levels." "Excellent point, Martin," I replied. "As a matter of fact, I need to brief you later on a conversation I had yesterday with a union officer at a meeting regarding foreign labor market competition and some of the discussions the stewards are having regarding our approach to change with Phoenix." "Yes, of course, John, I've been meaning to call you about that," said Martin. "I want to share some of what Mr. Antonio and I discussed at the lunch meeting we had a few weeks ago. I need to make some changes as part of Phoenix that will affect management, and I will need your input." Martin understood very well that in order to achieve the kind of numbers that headquarters was expecting, he had to make some changes in management processes before talking about the current contract with the union stewards and asking them to concede and make sacrifices. Change had to be fair and equitable, and managers would have to make sacrifices as well. The news about jobs being exported outside the country was in all the headlines, but Martin didn't think this was the right place or time to bring up the issue. He moved on. "John, what changes are proposed in the short- and mid-term for administrative information systems?" asked Martin. Process-Driven Information Systems "We are giving higher priority to the formation of cells at the office level, over the implementation of the information system," page_252 Page 253 I answered. "We are just not able to do the two things simultaneously: to get people used to the culture change of having to work as part of a cell, and at the same time, install a new information system and train people to use it. We are, however, making very minor adjustments now to implement essential functions to support the work at the cells. For example, any member of a cell can have access to the work performed by another person in that cell to share information, offer support, or help each other. "Something that is also in its final stages for the short-term is the allocation of operating

budgets for each cell, the opening of cost centers per cell, the creation of cell accounting records, and the visual displays to report progress on achieving the goals that are being defined for each cell." "I know, I've seen some of them already," said Martin. "My idea is to set invoicing, collection, and client service goals for each of the cells prior to discussing them with the cell business managers. "My biggest concern now is to generate internal mechanisms to synchronize the work so that business managers have the autonomy they need to make decisions without depending on me all the time. There is no other way, considering that I now have twice the number of managers reporting to me, including the centralized sector managers and all the cell managers. The difference is that before, I had to supervise department managers, but now I have to lead businesspeople and make them accountable for the results. Right, John?" Once again Martin was sending a veiled message to some of the managers who had gathered around us. "I actually like it: We are better applying the intellect of our workforce at the baseline of the business, and the system seems much better. "So John, in the mid-term, what is the general idea for changing the information system?" "Once the culture of the organization has assimilated the cell concept," I answered, "and with emergent requirements that will come to light as a result of cell teams working on the process every day, additional steps can be taken to integrate all the systems in the organization. A state-of-the-art commercial software package can be purchased, taking as a basis for our systems requirement the process orientation that will already be in place." "When will the first cell be launched?" Martin asked. page_253 Page 254 "Next month," I replied with no hesitation. Plans were on track and people were cooperating more and more. "And it will be a success, Martin. It will be seen by the whole organization. If you would like a copy of the detailed design, I have one in my office that I can send you. I know that Klaus is organizing a kick-off event to celebrate the start-up with everyone involved with that cell. Now everyone will want a similar celebration when their turn comes!" "That's okay, John. It is money well spent!" said Martin, looking around at the group of bystanders that had doubled in the past five minutes. A new culture was being created right there and then, and Martin knew what he was doing. The 20 minutes we spent chatting informally in the open office area had contributed more information to employees than any of the "all-hands" meetings we have had so far. Word got out about our encounter in the open office area, and everyone was talking about Phoenix and the latest issues on the mind of their company's president. They were seeking out more information from those who had participated in our conversation. The message was simple and clear: There are no secrets in this company. Everyone has questions, including the president, and everyone is working hard to find the answers. We are all in this together. page_254 Page 255 8 The Human Factor Several months had passed since we started the implementation of Phoenix. The factory cell deployment was close to 80 percent complete, and the installation of the office cells was not too far behind. After all, Phoenix in the Administration and Commercial sectors had started a month after its implementation began in Manufacturing. Several of the company's distribution channels were already "Kanbanized," and so was the factory's central warehouse. The company's structure and system had already adjusted to the changes involved with the first phase of transformation; management and workers were starting to show signs that they were ready to start the second phase. Martin was already communicating his vision for the second evolutionary stage for the company. Many critical technical issues that came up during the first phase were not surprising; I used my experience on previous change projects to quickly dispense with them. Phase one was

relatively easy. In contrast, the handling of change at the human level posed morechallenging issues; I knew that in the end, Phoenix would succeed, but it is fair to say that each company I've worked with presented its share of surprises. When it comes to managing people changes, it's different at each company. Sensitivity and common sense had been our two greatest allies in the search for unique solutions for each situation. I thought to myself that maybe some day the causes and the solutions to various aspects of the resistance by human beings to change could be typified and looked at in a more systemic way. I had had a conversation about this topic with Martin, who was aware of its implications on our project. page_255 Page 256 It had been an exhausting day. Martin and I were having a cup of coffee after a long progress meeting with Arthur, Robert, Susan, and Klaus. "This project has been very revealing, John," Martin commented. "Frankly, I think you never stop learning about your people. You find individuals who never stood out in the company, but now they show tremendous flexibility and adaptability when they face new challenges, and develop creative solutions to overcome them. Conversely, other individuals in critical positions have been totally reluctant to change and support a project that will revitalize the entire company. Why do you think we have such paradoxes?" "There are several reasons for this, Martin. It is an interesting philosophical issue, since human factors are the main reason why this type of change project might fail in a company. It is difficult to analyze and difficult to control, and therefore is the least understood. "Martin, let's have another cup of coffee and I'll tell you about several situations I have experienced that might explain some of the mental blocks and personal afflictive emotions people have about change, or perhaps more accurately, when people sense that change is being imposed on them, and they feel powerless." "Sure, go ahead, John. The next round is on me." Mental Blocks in People "The main factor," I added, "might be people's fear of change. This is directly related to the personalities of participants in the change project." "Why does fear come up, John?" Martin asked. "We are telling them exactly what is going on here." "I know, Martin, we are doing all we can. But human change requires patience. Fear is generated by the general feeling of uncertainty. It is like walking on the same straight road from your home to work for years when suddenly, without warning, the road is changed. Someone replaced the road with a labyrinth. The rules of the game changed, and there are no guidelines to tell you how to behave. You can only use your experience and ingenuity. page_256 Page 257 "As you are walking on the new paths, you find other people in the same situation. Some lobby to destroy the labyrinth. Others explain that the labyrinth was built as an interim step to a better road, that it is a temporary thing, and that you must help construct the new road," I continued with the analogy. Martin would later use it to explain to other managers his expectations of them. "And then someone explains to you on a map where the old road is, where the labyrinth is located, and where the excavations for the new road are starting. Then you begin to understand why this new road is needed, and how you will be able to walk on it and feel safer. There are other fears, but they are less important. Suddenly, you start making sense of an otherwise disconcerting situation." "Are you trying to say," commented Martin, "that one of the main components of the resistance is ignorance , arising from a sense of fear?" "Yes," I answered. "Ignorance about what is going on generates anxiety and fear. But the real danger in any change project is that fear and anxiety spread like wildfire through the organization by emotional contagion. Creating positive team emotion at the cell level goes a long way to immunize the organization of any possibility of rampant emotional devastation

and demoralization. "I remember the case of a chief production manager in a factory. We had jointly designed a Kanban that directly indicated to workers in five cells what parts to use, in what sequence, and from what cells to obtain them. Parts were being removed from the Kanban by upstream cells, and the Kanban card was released when the order point was reached on the rack; then the card went to the production board in the respective cell. This in turn replaced the launching of multiple production orders by the MRP system. "Formerly, the orders were sent through the system, taking into account the existing stock. Suddenly, the procedure changed 180 degrees for that individual. It hit him that the workers at the cells were performing the programming and that everything moved like clockwork, and instantly. "Before, due to the time spent on the identification of production needs and the tactical replacement of stock, delays of about 30 percent of the time were not uncommon. Now there were no page_257 Page 258 'dead-times.' The chief production manager was confused and scared: Could he still keep his job?" I asked rhetorically. "The answer was yes, but he never raised the question openly or inquired about his new role. No one knew yet what the new role would be for him, but when we talked, he understood that his old role had to change. But it also created an interesting opportunity; he no longer needed to operate the MRP module in charge of the launching of production orders. Now he had to supervise and audit the Kanban system, and train the staff. He was now responsible for launching new products as well supervising the right production mix. He was now in charge of adjusting the Kanban system to various requirements. He had to make sure that the cycle that was followed by the Kanban cards, from the warehouse to the cells, was accurate and that production at the cells was conducted in strict FIFO sequence. "Order and cleanliness in the system were also important, and opportunities came up to give feedback and just-in-time training to workers on a daily basis. When the employee (formerly the production manager) understood his new role, he took it on as a challenge." "I understand from this example, John, that you conclude that the most important reason for mental blocks in individuals is fear (or a similar afflictive emotion) and, in turn, these emotions emerge from uncertainty," commented Martin. "Yes. That's right. The causes of uncertainty can be twofold: (1) the individual is not sure he or she has the skills to perform in the new role, or (2) he does not know if there is a job for him. Since the main cause of failure in change projects is the human factor, and since the main influence is uncertainty, I would say that a very critical component in project success is communication ." Communication: A Vital Piece "Communication," I continued, "is a vital component of the project. It does not only mean something formal. It means all the different moments of communication that happen in the company. It is a formal letter, a meeting, a smile, a chat by the desk, a hallway conversation. page_258 Page 259 "The president of a company does not have time to have a personal chat with every member of the staff, although that would be an ideal situation. So you have to use effective communication and delegation mechanisms." Martin added, "So examples of effective communication include my meeting with the managers, and their subsequent meetings with their direct reports, or the conversation we had earlier in the public office area?" "Yes, Martin, but that works well here in this company. It might be different at another company. The company culture has an influence on the initial choices of different communication mechanisms. But there is always an initial communication dealing with strategy and objectives.

"The development of the change design follows after the initial kick-off. One doesn't need to involve an army of Organizational Development specialists or consult with sociologists to effectively manage change at this stage. But the most effective thing a manager can do is to involve as many employees as possible in the change project. You cannot leave out anyone; the key to success is maximum employee participation. "Companies that decide to leave the responsibility of change management exclusively in the hands of a group of specialists commit the same mistake that other companies committed when they created a total quality management group in order to achieve total quality." "You say that," said Martin, "because in that case, the responsibility for change fell on the total quality group manager, and not on the company managers themselves." "Exactly," I answered. Beyond the valuable methodological support provided by professionals in the field, it is fundamental to involve the whole company. The president has an essential role in giving a clear and coherent message. In order to involve the rest of the company, basically you must find mechanisms that make the largest amount of people in the company feel that they own the change by participating in it. "That way, you satisfy a double purpose: You create certainty about the path that needs to be taken, and you create a sense of ownership of the performance of change. page_259 Page 260 "We are doing it here through workshops." "What other mental blocks can exist?" asked Martin. "Once the first blocks related to uncertainty and to a certain extent related to personal survival have passed," I answered, "other less-critical factors appear that can pose resistance to change." Loss of the Traditional Power "Isn't it a kind of Maslow's Hierarchy applied to reengineering ?" asked Martin. "Feeling uncertain about new work issues, the individual seems more dissatisfied with the first place where the status quo is disrupted." "Yes, something along those lines," I answered. "If the individual is certain that his position is in no danger, he might look at other areas where there is uncertainty. It is part of human dissatisfaction. For example, another factor is the loss of power, or more precisely, the loss of traditional power." "Why do you distinguish between the two?" Martin asked. "Because, for many individuals, the idea of power consists of the externalization of a series of facts and procedures: giving direct orders as to how a job should be done without asking for input from those who do the work, having a big office and a secretary, being close to senior management, etc. All of this dramatic change with a cellular scheme adds to the possibility of losing this exteriorization of power, having to share decisions with former subordinates, or even seeing that a former subordinate is promoted to a position equivalent to yours. "In fact, relationship changes substantially within the cell, as you have already seen, Martin. The business manager must work with his team. The authority relationship is based upon the respect for knowledge and common sense felt by his fellow workers. Some of the decisions are made by the business manager and the members of the cell. And many others are made autonomously by the members, within a previously established frame. "Also, these external signs change since the business manager usually does not have an office in order to be 'another member of the team,' and to have visual contact with them. Usually, he/she page_260 Page 261 does not have a secretary, either. The person who performs these functions is called a team assistant in other companies, and we adopted the same approach here."

"Why does loss of perceived power block individuals?" asked Martin. "It is probably due to misconceptions about what a boss should be," I answered. "It is deeply rooted in our culture and even in the comics that a boss keeps a cigar in his mouth while he scolds the subordinate standing in front of him in an outward display of power. Subconsciously, the boss believes that any departure from that cultural view would put him/ her in a perceived position of 'weakness.' "Keeping distance by building language walls, using an office, or creating any kind of barrier with subordinates satisfies a double purpose: First, it is the exteriorization of the symbols of power, and second, it puts enough distance between the boss and others to create a safety buffer to help him/her deal with unforeseen situations. These are the most likely reasons why the loss of power creates a blockage, without exploring the issues relating to distorted personalities and psychological problems. "For some individuals, the feeling of losing their power does not arise from the change in cultural norms and relationships as much as from the fact that they have to share power with other people. When an organization migrates to a cell scheme, the number of business managers increases at a higher rate than normal. If the individual who resists the change is a senior manager or a department head, he or she might stay in that position, as head of a centralized and non-cellular section." "What is the remedy for these situations where management resistance occurs?" Martin asked. "Well, Martin, it's hard to say because one cannot foresee all the situations and nuances that might come up. There really is no easy answer to your question," I replied. "As to the change in 'external factors' related to power, we might divide them into two groups, if you like: the soft factors and the hard ones. "The soft factors refer to changes in the relationship between a boss and his subordinates. With few exceptions, everyone has page_261 Page 262 to learn to go from being a boss to being a leader—to be respected for who we are and not for the position we occupy. An intelligent individual who has been trained by professionals in Human Resources about matters of leadership, conflict resolution, and negotiations should be able to learn how to use his or her interpersonal skills to adapt to the situation. "The hard factors of the new management/labor relationship scheme—the business manager does not have an office, the team assistant is not an exclusive secretary, and so on—are easily assimilated when the whole company migrates toward the same scheme, in all departments and without exception. "Normally, the announcement of an 'open space' culture (both physically regarding offices and work areas, and relationally by stimulating informal face-to-face relationships) provokes an initial reaction from those primarily involved, but it becomes more palatable and easier to adjust to if the change affects everyone in the same way, with few exceptions." "I see, John," continued Martin with more questions. "As to the sense of 'power loss,' what happens when a traditional manager becomes a cell manager?" "That is a more subtle issue," I answered. "In some cases, individuals experience this transition as if they are going from being the lord of the feud or the benevolent dictator to being the mayor in a democratic town. It is important to make the former manager or boss understand that the latter situation is much more demanding than the former, and that having been chosen is proof of the confidence that the company has in him/her. In fact, the promotion method has not changed. In the cell organization, you are promoted from cell manager to general manager, without all the intermediate levels. A natural outcome for business managers is that lateral movements from smaller cells to larger cells that require more responsibility are also considered promotions. "Obviously, this process is a very sensitive one. Individuals in managerial positions have a strong sense of self-esteem, which is a desirable trait, but the way things are said and how the changes are communicated are as important as the content. They must be competent communicators who can precisely focus on respecting and understanding the feelings of others. page_262

Page 263 "All these sensibilities, Martin, are particularly important for managers or heads of office sections. There are some similarities to what Manufacturing supervisors who might be in charge of one or more cells will probably have to do more facilitating. Training and Leadership Development "What other issues can block people's minds when it comes to change, John?" Martin asked. "I am still talking about a kind of Maslow Hierarchy of Needs for reengineering. Some of the issues have to do with individual insecurity about one's personal and intellectual ability to adapt to the requirements of the new role. Individuals who have already been appointed as cell managers or supervisors of several factory cells, even when they have been assured of their position in the new organization, feel unsure about whether or not they can completely adapt. "The new functions require leadership qualities that some individuals never exercised, leaving many to wonder what it means to be a leader . And they're not certain if their actual behaviors correspond with being a leader. Also, depending on psychological predisposition, the person might feel that there will be a witch hunt for new leaders who are not displaying the right behaviors. Cell managers know that they're much more exposed to criticism than other team members because of the high profile of the position, and required interpersonal relations. "All this can cause individuals to remain passive and non-committal about the change. They will fail to convey the conviction and necessary degree of passion that leaders need to demonstrate in the new organization." "Okay. But what would you do about this, John?" asked Martin. "The key to addressing this issue is to make a thorough assessment of people's weak and strong areas before you implement change, and focus especially on people who are being appointed to leading positions in the new cellular structure. You must create a training program for all the staff to bridge the knowledge and page_263 Page 264 competency gap in different technical and human aspects of cell work. The idea is to give cell business managers the necessary tools to start managing the group, while shoring up their leadership skills with coaching and feedback. The professionals in these areas, such as sociologists and psychologists, can offer tremendous help in getting them started," I replied. "In other cell implementations in office environments, the group dynamic was closely monitored during the initial stages in order to identify the quality of interaction between the business manager and the team members or among the team members in general. From this close observation and analysis, business managers and cell team members were assigned to the correct workshop or targeted training intervention that is focused on individual and group performance: individual coaching, classes given across cells, or just activities to build a positive team emotion in a specific cell. "The key to addressing the anxiety, fear, and self-imposed limitations is to support the leadership that exists by buttressing the leadership qualities and competencies of the new and experienced leaders. On the other hand, managers must send a clear message to the rest of the workforce that if there are limitations, everyone should show humility and willingness to face the challenge. This in turn stimulates leadership potential in all employees and provides the needed psychological safety at all levels in the company." Motivational Myopia and Negative Emotions "That is so true, John," said Martin. "I believe that when people acknowledge their own limitations to themselves and to the group, they feel less alone and are more likely to cooperate and succeed. Without a doubt, it is a new way of leading and relating to other employees and peers. Personally, I believe that you can learn to be a leader," said Martin. "Besides, John, we should define for the rest what we mean by leadership qualities and being a leader, don't you think?"

"You are right, Martin. For me, leadership is not management or supervision. I believe that the basis of leadership is to respect page_264 Page 265 others. I also am of the impression that leadership can be taught, but respect for other human beings must already exist." Martin agreed. "An individual who doesn't respect others as individuals could never become a successful leader." "I agree with you, Martin. Leadership is not just directing or managing individuals. Leadership creates in individuals and teams a relationship of mutual respect and affection. A leader must be someone who learns to become the role, not just act the role." "How much is lost of an individual in a conventional organization?" asked Martin. "For example, let's assume an ideal of 100 points for a state of total synergy between a group and its boss in a traditional organization. Now that I have seen the higher level of communication, enthusiasm, and emotional synchrony a cell organization can achieve, I would grant only 50 points to the synergy achieved in a conventional organization!" "I share that, Martin. I believe that most organizations today live in a state of motivational myopia. Perhaps you've visited some renowned company and observed this. Apparently, everything is working fine. You observe people at work, and see that they are busy with their tasks. But in the halls, you hear some disgruntled conversations, and find out that the same conversations take place in the office restrooms. But if you had to define the rhythm of the work, you'd probably call it standard. The absence of passion is conspicuously present, however. Lacking that flame that gives out creative energy and produces innovative ideas, the organization is good, but not great. In the end, it is a matter of creating passion, and believe me, there is no computer software that is capable of creating that." "Okay, John, so in 50 words or less, how do you generate that passion or that team emotion you've been telling me about?" "Me, 50 words or less? Now you are really pushing it, Martin, but I'll tell you anyway. Two things: First, an organization's culture must value people for who they are, not just for their performance in a particular job-task. They are not always responsible if management assigns them to the 'wrong' job. And second, value the whole person . Just ask yourself how much talent walks out the page_265 Page 266 door because management doesn't really value a person's hidden talents—if they are even recognized! As for generating positive team emotion, that is something the team needs to do by itself. All you can do is create the proper context and control the intervening variables that can prevent negative or afflictive emotions—the teams will do the rest. Just ask yourself this, Martin: Do you know all the talent you already have here? Your human and intellectual capital? How much of that talent can walk out the door today, and how can you prevent it?" Let's put it a different way: How much talent are you buying outside the company? How many jobs are you exporting overseas to buy that talent, because you don't know what you have here? Hypothetically speaking, of course," I remarked with a smile. I didn't really expect Martin to give me an answer. "John, I believe you are way over the 50-word limit, but I get the point. Respecting others and caring about their emotional well-being sets the stage for that passion to emerge. That is a reality, that we are just starting to experience now in the company. Because of the cell structure, the necessary conditions are given so that we are starting to reach a degree of productivity that was unimaginable in the traditional organization; even when we thought we were producing at 100-percent capacity, we were still leaving a lot on the table," Martin continued. "John, when I compare the performance of one cell with that of another, I note differences. Just the other day, I noticed that a cell working at its best to meet production goals showed a certain synchrony among the members. It seemed as if the whole team was tuned in to

the same mental channel; ideas and actions resonated into harmonious results. I saw an entire cell team preparing to switch production runs, resetting all five of their machines and changing to a different operating procedure that was 180 degrees different from the previous one in fewer than 20 minutes! Not days, like before. Can you comment on that?" "Sure, Martin. In 50 words or less, what you experienced with that cell was a collective act of emotional display triggered by emotional contagion—the team passion surged at that moment. A positive team emotion crystallized in the collective act that you page_266 Page 267 witnessed, and at that very moment, the cell became 'team.' Positive, non-afflictive emotions at the individual level are good, but what you are looking for in cells to be happy and productive is exactly the type of team emotion you witnessed the other day. And I expect to see more of that as time goes by and cell teams reach a higher state of emotional maturity." "I can't wait to see that, John. The excitement is getting to me, too. What other things did you find in other organizations that help remove mental blocks and resistance to change?" "Still speaking about minor issues," I answered, "you find people in organizations who feel they have earned the right to a work life of comfort. Generally, these individuals feel the company owes them for their past achievements, and now they feel entitled to do less. Don't get me wrong, it might be true that the organization frankly is in debt to them. The problem is how these individuals interpret the collection of this debt. And some of them erroneously construe it as a right to a status quo with not too many obligations." "I believe these individuals exist in every organization, John. And some of them you do want to keep around." "I don't disagree with that, Martin, but the essential point is to know if they are willing to 'reconvert' or not. You can't afford to keep paying over and over for a service they provided you in the past. By talking with them up front in a conversation recognizing their competence and past achievements, you must state that the company has new challenges for the future and that you need them 100 percent. This conversation may also be an opportunity to extend the option to help them move on to pursue other interests, through financial incentives, if they decide not to embrace the new organization." "Such as a 'golden parachute,' like what you give someone to retire early so that they have a soft landing?" asked Martin. "Well, similar in principle, but I wouldn't call it a golden parachute, since many of these individuals have long careers ahead of them. I'd call it a 'silver bridge' instead. That way, it is a win-win situation between the company and the employee." "Are you thinking that if they do not change and stay around, they would be a bad example for the rest?" page_267 Page 268 "Exactly, Martin. Generally speaking, individuals react more to relative comparisons than to absolute ones. It is common to find in a cell that an individual is more bothered by his coworker not pulling their weight or not helping others than by their own working situation relative to other companies." "Okay, John. What else is there that causes managers and employees to have mental blocks?" "Many more things Martin. But I will just mention two others: (1) arrogance and (2) distrust of management's direction of the company. The first one is almost a personality trait. Generally, these individuals are self-sufficient and enjoy some internal prestige. They might underestimate your changes by thinking it is more of the same. Normally, these are individuals with a high level of intelligence and performance. This attitude might be tolerated by some individuals, but usually arrogance acts as a mental barrier for the creative development of ideas—and this can destroy the possibility for continuous improvement within the cell. On one hand, the work and ideas of co-workers are underestimated. On the other hand, change itself is underestimated, and that individual stops thinking creatively since they think they already have all the answers."

"What can be done with these individuals?" asked Martin. "What always seems to work is for the direct supervisor to confront them clearly and precisely about their attitude. If the individual is smart, he will change the attitude. Occasionally, these direct face-to-face talks surface hidden causes of arrogance that the individual sometimes uses as a shield against situations he believes are unfair. This opens up another opportunity for a supervisor to have more developmental dialogue with that employee." "And what about distrust toward management's direction of the company?" Martin asked, "What does that mean?" Leadership with a Sense for Emotions "This is a very subtle feeling that can surge at any level in the company. It might be felt by a director or by a cell business manager when appointed to direct a work team, or, before that, at the beginning of the change process. It is an individual feeling that page_268 Page 269 sometimes is not externalized in the form of emotion, and often emerges subconsciously: that the proposed change is an artifice exclusively designed to satisfy the self-interests of company management. This internal feeling can be emotionally manifested in a multitude of ways and places, and can have a devastating contagious effect on the emotional climate of the company. A snide remark, a 'wink' at the wrong time, a roll of the eyes, etc., can have an emotional ripple effect and quickly turn into a critical emotional incident that derails the change process," I replied. "So what you are saying then is that a negative emotion in one person can be transmitted and shared silently over time with part of the group, and left to fester through gossip or subtle innuendos until it explodes in a public incident, like the shouting match we had last week in the cafeteria between two supervisors who had a problem with the new team allocations. In your opinion, John, why do these individuals think like that?" asked Martin. "It can be an internal reaction, often subconscious, against things that took place in the past that have left an 'emotional scar' or what I call a 'fossilized emotion.' Unfulfilled promises, arbitrary decisions, unjust actions, and false expectations reduce the value and lessen the respect toward the decisions adopted by company management. But perhaps the most dangerous consequence of individual attitudes has to do with the belief that the proposed change hides other interests that are detrimental to the interests of the majority of the organization. These situations affect the management structure as well as factory labor, engendering passive resistance to the change. Generally, it is not an overt reaction but a veiled one, due to perceived personal risk in being openly antagonistic to the company. The emotional manifestations of these feelings, either individually held or shared by the group, vary according to the individual's level within the company. They can range from sabotage or induced failure, to mere lack of interest. When several people share this negative feeling, their random manifestations can synchronize and feed back negative emotionality to the teams, creating a collective act with a negative resonance." "How does one deal with such a situation, John?" asked Martin. page_269 Page 270 "Well, in my opinion, negative emotions are the most difficult problem to address because they often have to do with events and episodes that took place several months or even years before. The individual may have deeply internalized those feelings to the point that the original event has been forgotten, but the residual negative feelings remain in the subconscious, creating for that individual a genuine distrust of the new proposals. Since those feelings remain inside and can rarely be verbalized without external intervention, it is difficult to identify those who think this way so that you can work on solving the problem. These forms of skepticism are not resolved overnight. They do diminish with time, but at the rate these feelings are repressed, it can take a very long time and will always be there, just below the surface. To help this process of 'selective forgetfulness,' you need to take specific

and proactive actions." "What kinds of proactive action do you mean?" asked Martin. "Here again, Martin, good leadership and new cell organization help alleviate these situations. For example, management's strict compliance with any promises made combined with open dialogue and a 'transparent' communication policy go a long way to set the context to overcome negative emotions. That's just common sense and good management preventive practice anyway. But if the situation does come up, it is important that time be set aside to reflect on the causes of that attitude, individually and in groups. "A few years ago, I worked on a just-in-time project at another local factory. It was the beginning of the project, and we were having staff and work meetings in parallel with the technical part. I was holding the first meetings with the workers when we explained the purposes of the project and our vision of how we could work with cells. "For the most part, people listened carefully to what I was telling them, and I enjoyed the handicap of being an outsider and not having a 'history.' They appreciated the fact that I explained and openly shared with them the future vision of how the work would change. The meeting also had the purpose of explaining the essential elements of change and hoped to remove the fear generated by ignorance of the process. page_270 Page 271 "As I was finishing the presentation to the workers, they had a great number of technical questions. They understood the topic and were interested, but toward the end of the meeting, an individual commented in a loud voice, 'I don't know if I can believe in all this. I remember ten years ago we were asked to agree to a reduction in pay due to economic difficulties in the company. We did agree to it, and the company did well, but nobody ever acknowledged our sacrifices.' "That individual remembered with great emotion something that took place ten years earlier. And he said it in front of all the rest, and with great feeling. The comment remained within the walls of the meeting room. Nevertheless, it had a cathartic effect. Meetings with that work group continued, and I joined them a month after the incident. That individual was still there, and not only did he not mention the 'sacrifice' again, but he was one of the most cooperative team members. He voiced his concern out loud and in public, in front of management and a neutral third party, and this contributed to making him feel better. This happened several times and with different individuals. If you can get them to open up that way, the situation has a chance to improve." "I can also relate to that experience, John, but what happens when these negative feelings emerge during work and in places where leadership does not have access or is not allowed to intervene to help resolve the worker's affliction? Isn't that just plain gossip or useless 'drift'?" asked Martin. "Yes, of course," I replied. "What you actually hear about negative feelings and emotions that exist and what you can actually help alleviate is just the tip of the iceberg. Most of the emotional damage, contagion, negative resonance, etc., happen at the cell level and when you least expect it. But there is hope. Use the cell structure where face-to-face contact of the team members is possible and use positive team emotion, and you can counteract the drifting away from the new order you are trying to adopt. Leaders who are sensitized to team emotion and emotional dynamics can create the proper context for team emotional competence—itself a collective act that emerges and propagates from positive team emotion." As I finished talking, Martin once again seemed lost in his own thoughts. page_271 Page 272 "So what you are saying, John, is that by using the same cell structure where negative emotions emerge undetected, and somehow getting the team to become emotionally competent to deal with negative emotions as a group by addressing concerns that surge in some members right then and there, you are 'fighting fire with fire,' right?" "Yes, I hadn't thought about it that way, but that's a good analogy, Martin," I replied. "Okay, John. Then I have my work cut out for me. You give me leaders with a sense for

emotions, and then train the cells to have team emotional competence. You can train for that, can't you?" said Martin with a big smile on his face, letting me know that he was joking with me. "I'm not sure about that," I replied. "We can train the teams up to a point, and we are already talking about that with the Phoenix work group, but to be a team emotional competent work cell is a different story; teams need to become that on their own." Mistakes that Cannot Be Accepted "I understand, John. But seriously now, the human factor is a very complex issue, and as you said earlier, I do not think there are any magic recipes to get it right. With smarts and common sense, you can possibly solve many issues," said Martin as he poured himself another cup of coffee. "But I'm sure there must be certain things that should not be done, that the company and the management group should avoid at all costs. Just with the limited experience we've had with the Phoenix project so far, we could share a list of items. Don't you think?" "Well, Martin. What mistake would you place first on the list of things to avoid?" "In my opinion, and according to what I have experienced so far," answered Martin, "I believe that it is impossible to launch a deep transformation project in an organization without a high degree of personal participation from the highest administrative positions in the company." page_272 Page 273 "That is true," I answered. "I agree on that. You know better than anyone else the objections people put forth when faced with changes. There are probably one thousand and one ways of opposing something, ranging from the very active to the very passive. Even if you do your best with the initial communication, and then follow up with status reports, you will always find some resistance, and that is only human nature. The most important thing you can do about it is to maintain a solid and coherent stance about the objectives of the company, and respect the priorities of the project." "I have not spoken with the managers of other companies undergoing similar processes," explained Martin, "but I understand that the mere 'declaration of principles' is not enough." "We have given first priority to the Phoenix project regarding time and resources. And we are comparing day-to-day change decisions with the strategic vision of the project. For example, when the time comes to decide on the acquisition of a new machine or a software package, we evaluate making an executive decision against empowering a cell in the factory or the office to do it." "That means having consistency with the new vision from the technical and economical point of view," I answered. "But people also test your adherence to the new organizational changes in your everyday attitudes. And you must be very aware in order to be perceived as just and equitable in every decision," I added. "Have any of these change projects been implemented in other companies without the support of the president?" asked Martin. "It would be impossible to do a change project of the magnitude of Phoenix without support from the president," I answered. "But I do know of companies where an important change project was initially endorsed by senior management and then left to middle managers and consultants. These projects were never as comprehensive as Phoenix, and in many cases they were scaled down in mid-stream or were never completely implemented. They have not been proper PBO projects." "There must have been many reasons, John," commented Martin, "for this type of situation." page_273 Page 274 "That is right. Some companies initiate this type of project because they are told to do so by their home offices, but they lack the right motivation to fulfill it. Or they have not delved deeply enough into the philosophical and technical principles of a PBO project to fully understand the implications. As a result, management sends out a weak message regarding

the need for change and its expected benefits. Without passion , it is a project doomed to fail in almost every case. "Other companies begin a strategic change project with the proper determination, but halfway through, they trade their strategic vision for an easier implementation, changing emphasis and priorities. This happens because management lacks the mental energy or the perseverance to complete a change project that is measured in months rather than in days or weeks, or a new management buzz-word appears and the project gets derailed. "Therefore, when the president of a company is convinced and committed to an ideal, he/she is the pilot flame that ignites the daily fuel for this type of change," said Martin. "Provided that leadership exists in the president or chief executive of the company, John, what other types of basic errors in the human aspect should be absolutely avoided?" "Do you have anything specific in mind?" I asked. "Yes. Actually, I am thinking about the timely correction of disruptive behaviors, John. We had a manager here who was sending contradicting messages. When he met me in the progress meetings, everything was fine—he expressed his support of what was going on. When he was with his people, however, he deemphasized the importance of the changes being done and lowered their priorities. As a result, there was a growing time lag between the schedule assigned to his section and actual progress within the Phoenix project. The people reporting to this manager felt that the project was not important to their boss, and they automatically tuned it out. People seem to respond to the person they think pays their salary—in this case, their boss." "How did you resolve this, Martin?" I asked curiously. "Well, John, I had a serious talk with that individual's boss, who happened to be Arthur. Obviously, Arthur took matters into his own hands and the response was almost immediate. A month page_274 Page 275 later, the gap in the schedule had disappeared and that manager changed his attitude toward Phoenix. I must add that I was quite firm about my expectations when I spoke to Arthur, but I do not regret it because the situation was corrected as a result," explained Martin. "As a first step, I accept that we had some knee-jerk reactions," I answered. "And I agree that this is important to take care of right away. You cannot afford to make the mistake of letting things linger without taking appropriate action. Obviously, something happened to that manager you mentioned, and it might have been one of the reasons we were discussing earlier. You did the right thing by giving first-aid to the wounded. But I am sure that with a little more time, you would have gone deeper into the root-cause of that manager's behavior. You can uncover more fundamental problems than just fear of change." "That's right, John. Without a doubt, he feels threatened by the changes introduced by the Phoenix project, and it is necessary to find out why," I replied. "But you mentioned knee-jerk reactions," commented Martin. "And I want to get that clear. I believe that delaying an implementation is another mistake you cannot commit. If we had decided to wait instead of pushing ahead with what we had, as we did with the office cells for the new integrated system to be ready, we would not have implemented a single cell. And I think about the consequences: an organization waiting anxiously, without getting any feedback on practical facts. Burnout would be an important consideration. Instead, by acting quickly, the results are obvious: We increased productivity, we reduced delivery time, and we created a sense of 'business ownership' in the whole company by only tweaking the existing information system, and concentrating on the human change in the first phase," said Martin with conviction. "I agree with you, Martin," I answered. "Preferably the implementation should not be delayed, although some unknowns might need to be addressed later. In Phoenix, process improvement teams formed by members of different cells were generated as the cells were being implemented. As the basic procedures that were page_275

Page 276 defined previously took form, a new wave of improvements was already being discussed by these cross-cell process improvement teams. "A faster implementation, when successful, gives immediate positive reinforcement to the organization and brings into reality what people imagined. A faster implementation is also important to consolidate the project plans and the team. I remember an organization that was designing the cellularization of all its processes and was about to put in place the first cell. But in management meetings, reasons always came up that delayed the implementation. Sometimes there were facility and building restrictions; other times there were issues related to future incentives and compensation for the cell work team. "Essentially, the real reason behind the implementation delay was a veiled resistance from the highest managerial levels responsible for one of the sections affected by the process that was supposed to contain all the cells. "These delays caused a psychological arm-wrestling match between the parties involved. There was also a history of failing to complete projects. And I think they were betting on this being another one of those projects. "The president understood the situation and put a deadline on the implementation of the first cell. In fact, this was a symbolic act for the organization. It meant that the changes that had been announced such as changing the culture, instituting new ways of working, and assessing performance would become a reality. The president personally attended the launching of this first cell to reinforce his support of the change project." "Okay, John. I believe that was a case of having good reflexes. Do you think the president made that decision by himself, or was he advised by the head of Human Resources?" "I do not think so, Martin. According to what I have generally seen, unless Human Resources departments have responsibility for organizational development, the managers of this function have enough work on their plates to keep them occupied. This can include changes in compensation and incentives, evaluation procedures, changes in organizational charts, individual goal-setting, and training plans. They seem to have page_276 Page 277 open fronts at every level: workers, managers, and directors. By shear volume of work, they need to concentrate on these tactical aspects of change. "That's why, when at the beginning of the project we talked about a high percentage of your time dedicated to the Phoenix project, it was in part due to all the decisions that only you can make." The enormity of the task was starting to sink in. Martin was not going to shy away, but he realized that there will be sacrifices. Yet his commitment was unshaken. "What other mistakes should not be committed, John?" "You must think that perhaps those who feel most affected by this change are the directors and the managers of the company," I answered. "One mistake you should avoid is failing to put into action the adequate retention mechanisms for them. That is, you need to share your vision of where they are going to land in the big picture of the company. This is essential to help them with their fears and the 'mental blocks' we were talking about before. "In addition to this, the quick assignment of business managers to work cells helps reduce anxieties about the project in general." "I agree, John, the process must be carried out with appropriate judgments. You know the importance of an adequate selection of a business manager: The success or failure of the cell rests upon that decision." Martin hesitated a second or two, and then asked me to stay a few more minutes to discuss something that he believed could have a tremendous impact on the success of this change effort. "Of course, Martin. What's on your mind?" I asked. Fairness in Labor Management "Remember the lunch meeting I had with Mr. Antonio, the head of the local Machinists Union?" asked Martin.

"Yes, you were telling me about some changes you wanted to make as part of Phoenix that will affect management, and you wanted my input," I replied. page_277 Page 278 "That's correct, John. Mr. Antonio is very concerned with how industries are cutting costs by buying cheap labor in other countries—what the newspapers are calling the 'exportation of jobs.' He knows that industries are hurting because of global competition, but is afraid that giving away our workers' jobs has disadvantages that far outweigh the cost savings of cheaper labor. Looking at this problem as a process, you will recognize that unemployment takes away consumers from our own markets. There is little consolation if unemployment checks and benefits expire in just a few months; what will happen to those folks? People move out in search of new jobs, communities are destroyed, and flourishing developments become ghost towns. In short, John, it is a direct attempt on the life of our communities. Since I expressed interest in the community as a socially responsible and concerned citizen, he challenged me to be more creative in this regard." "But Martin, you were not planning to export jobs, were you?" "Of course not, John. But the rationale for exporting jobs, while unfair to labor, makes perfect sense to management. What Mr. Antonio is asking is that we look at cost savings, efficiency, and productivity increases for the company in a way that is fair to both labor and management. In other words, he believes sacrifices on both sides should be made, not just to benefit one at the expense of the other," said Martin. "Please tell me more, Martin. I'm confused, I thought we already were making sacrifices on both sides," I replied. "Well, not exactly," said Martin. "Look at what we are asking the workers to do for our benefit: 1. Learn 'new tricks' regardless of ability, as if this was so easy to do. 2. Break up the social ties that they've developed in the work-place, especially the more senior workers, to become part of a team with people with whom they never exchanged a word before, and in some extreme cases viewed as the enemy. Oh, and 'Please do this with a smile, too.' 3. Give up the comfort of a secure job with a complex-but-predictable job classification and a stable salary to accept page_278 Page 279 pay-for-performance and an uncertain future. I know, John, that we can argue the 'whys' and 'why nots,' or 'what will happen if we don'ts,' but the psychological safety and emotional stability of the workers is shaken to the core nonetheless. 4. Buried in these changes is the fact that seniority will not count for much in the cells anymore, and no matter how rational and cost-effective a decision this is, for the people who worked all their lives under these rules, it doesn't seem fair. 5. While we are asking them to reason why we do all these changes—and believe me, most or all of them get it—we know well that fairness is not something we rationalize about, but something we feel. Even when you think something is unfair yet you listen to and accept the best counter argument, you still feel unfairness in your heart. You were the one who taught me about this, John," concluded Martin with a sad tone in his voice. It was obvious that the man had been carrying this burden since he met with Mr. Antonio some time ago. "Martin, I can't disagree with anything you just said," I replied. "This is the reality we are living right now. We might just have to accept it and deal with it the best we can. But what do you want me to do?" I asked, not expecting the kind of response I got from a president of a successful company who holds all the cards in his hand. "Well, John. I've decided that we, management, will make sacrifices around here to even up the score. Everyone here needs to develop a personal stake in this company; put aside the incontrovertible differences we have between faceless labor and management, and put names and faces to the real issues that exist between us: worker Joe, business manager Mary, and so on. Help them resolve whatever it is they need to work out."

"I'm not so sure that this is all you need to do," I interjected since he had left the proverbial door open for me. "What about the unfairness between the two groups? Let's face it, Martin, management makes a disproportionate amount of money, compared to page_279 Page 280 labor. And I'm not talking about anyone in particular here, but the fact that a senior vicepresident in any traditional organization who makes 5 or 10 times more than an average worker does not give anyone a feeling of fairness, do you think? I'm not saying that they should make the same; all that I'm trying to point out here is that there is a huge disparity or compensation divide that exists, and that does not go well with trying to make it fair for everyone here." I continued saying things to Martin as my "friend" that I would be very careful saying to another client. "How would you feel if the job being outsourced was yours, Martin? I know that much of your compensation as president of the company is based on financial performance, but is that recognition distributed fairly among all workers who were instrumental in exceeding the goals you set, and your revenue targets?" I stopped to get a read on Martin's reactions. I was worried about where the conversation had taken us, but I felt good that some of these things were coming out in the open. Martin sat there at his mahogany desk holding his face between his open palms, looking doubtfully at a set of goldplated pens on a marble base standing right in front of him. "I need to make some changes around here, John," said Martin, "and fast. Here is a list of questions and issues I wrote down after my meeting with Mr. Antonio. I need your help getting my management team together to start discussing them seriously. This is now a part of Phoenix, so tell me when and how it is best to introduce it." "Very well, Martin. Give me a chance to study the list and feel the way with your managers informally, but without revealing anything yet. You personally need to march in front of this parade," I said to Martin, and he agreed without hesitation. Martin's List of Questions and Issues to Discuss with the Management Team For Unions, it is not business as usual anymore. Mr. Antonio feels that the labor movement needs to change focus, too. Unions need to be more flexible and drop the rigid standards from the past. Can we as a management team work with the Union by adapting on both ends? page_280 Page 281 Can the seniority system survive alone? Can seniority, and competency, and performance work together to define compensation structures? How? Can we reduce the current 32+ level job classification system to 5 or 6 critical levels or bands without workers' loss of confidence in the system? Can we encourage education and training of the workforce? And invest in our people to move gradually toward a global knowledge economy? Can we establish competencies for all jobs including management, and pay for demonstrated competencies and impact on performance/results? Can we stop entitlement thinking without creating havoc? Move to private mediation for grievances? Find cooperative ways to resolve problems among employees? Can our workforce accept cross-training as a way of the future, while also respecting the wishes of those who don't want to or can't learn new skills? Can we offer those workers who opt out a comfortable financial package, including training, to learn-how-to-learn new skills on their own? Can our business management work closer with the union leadership inside our company to reach agreements that satisfy both sides, working together in a way that nothing is "notnegotiable" on either side? To help achieve the above issues, we will… Freeze management salaries for two to three years as needed until the changes proposed in Phoenix have taken root in this company. Stop management bonuses that don't reflect the actual results of the cells or central groups.

Give bonuses only on a team-by-team

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Page 282 basis, as long as it doesn't create a bigger "compensation divide" between managers' pay and the rest. Work with the Union toward meeting International Standards in Wage Regulations and competitive pay rates for both workers and managers. Extend to all workers and professionals in the company the same benefits given to managers and directors, including shares of stock and profits. This will allow everyone to develop a stake in the company. Starting in the cells, put aside differences; look for common ground and build on that. Seek private mediation if needed and use cooperative problem-resolution skills. Starting in the cells, build a sense of community by learning more about one another: family situations, children and elderly issues, dreams, and desires. Become more communityoriented. Work together—labor and management—to develop a positive team emotion for the entire company. Stop "comparative advantage" thinking that justifies sending jobs overseas, and learn to look at the entire process, antecedents, contexts, and repercussions at a system level. Avoid myopic decision making. Develop a social conscience. Build community. Create new jobs by going after new markets in consumer goods, wherever that might be. The Self-Evolving Organization The following week, I met Klaus to review the overall training and development plan. Before the implementation of each cell, a profile of the needs of each position was developed for the office sector; later, it was compared with the actual knowledge and experience of the individuals selected for each office cell. Based on the resulting gap between the existing competencies and what was actually needed in each cell, an on-the-job-training page_282 Page 283 program was developed. That meant individuals who already knew a particular function would train the new workers in that function at predetermined intervals with the help of Human Resources for capturing the knowledge base and preparing just-in-time/just-enough delivery methods. Working in cell-type organizations posed challenges that made them different from other types of organizations. One of these characteristics was the need to continue the level of the work load within the cell. By leveling workloads, the work was "fairly" distributed among the team members of a cell. Since the cells worked on specific processes, covering different functions, one of these functions, taken separately, could have greater burden of work than the others. For example, the order entry function for the entire Market segment assigned to a cell could have a greater burden than just the credit function for that same segment. This was not a problem in the traditional organization, since each department (Order Entry or Credit) absorbed any transaction from any type of client, without discriminating by origin. In the new organization, fair workload leveling meant having to establish beforehand, based on time consumed, number of transactions, or other task characteristics, what constitutes criterion for fair workload leveling. To facilitate work in the cell and avoid any saturation problem, every cell in the office had to be leveled before it was launched. For example, that could mean that the person in charge of credits assigned dynamically 50 percent of his time to attend to the input of orders. And, according to the type of task, a training plan of suitable complexity and time was generated for that function. The training concepts applied to the factory were very similar. As a result of workload balancing and cross-functional training within each cell, an individual could attend to his/her machine and one more. This was done in overlapped time (when one of the machines is

automatic) or sequentially (when operator intervention is required). In any case, training before launching of a cell was always necessary. This training not only included functional subjects, but also concepts of self-quality control, preventative maintenance, and machine setup. page_283 Page 284 Klaus was one of the managers who made the greatest contribution to the Phoenix project. This implied a time investment for him, in addition to his usual responsibilities. He was also a person with excellent managerial skills who knew well that the key to successful negotiation is understanding the needs of the other. He was already waiting for me when I arrived. It was late evening, and the staff in his section had already left. I could still hear the humming of the office machines and the buzzing of the fluorescent tubes that started to dominate the office landscape. The office door was open and I approached his desk. "Finally, John, we meet again," he exclaimed. "Lately, we have only met in directors' meetings," he commented. "That is true, Klaus. We have all been working hard and long hours. It would be easier if we could just stop production and devote our time exclusively to make the necessary changes, but that's impossible," I replied. "What is the emotional climate in the cells now, Klaus? Are people happy? What are they saying?" I asked. "The climate is good. They have taken it in very well at the factory, I believe," said Klaus. "I took advantage of the machine relocations to form the cells simultaneously. Also, the improvement of the lighting, the floors, the walls, and the dressing rooms was appreciated by all factory personnel. "Some things caught my attention," continued Klaus. "Last week, I was walking through the factory with Arthur. We walked past one of the first cells we formed. One of the workers in one cell stopped him and said, 'Boss, don't forget you are invited to our next continuous improvement team meeting.' I was struck by her enthusiasm about the upcoming meeting, but more so by the sense of ownership of the meeting and the ease with which she addressed Arthur as 'boss.' I was also struck by the reality of the cultural transformation that was taking place before my eyes. Arthur in turn responded with enthusiasm, and said that he was anxious to meet with them. Smiles flashed back to us as Arthur and I left the area." "Have you attended any of those continuous improvement meetings, Klaus?" "Yes, in fact I attended one this week in the cell that manufactures the stepper , the engine for lathes that uses continuous electric page_284 Page 285 current. All four cell workers were present, plus the business manager who is in charge of four other cells, Arthur, the chief of Maintenance, and the quality auditing chief. "The head of Quality Auditing (that's a new name for the sector) brought statistical control diagrams for the processes they do for the last two weeks. He had classified them according to type of engine produced (there are five types of steppers). He took the time to highlight the days and products when problems occurred. The meeting was not the least confrontational (also a departure from the old culture) and was conducted with a spirit of research and improvement. Arthur left the leadership of the meeting to his direct reports while supporting them with his presence. When an exceptional defect rate was detected, the root-cause of the problem was jointly investigated by members of the work team and management," Klaus continued relating his experience to me. "You know, Klaus, that the Japanese believe that you have to ask why at least five times before getting to the root-cause of a problem," I interjected. "Really, John? Well they asked a lot of questions of each other, but it didn't occur to me to count the number of why's they used," replied Klaus, with an innocent tone that betrayed his finding my remark humorous. Klaus was funny in that way, and I appreciated his lightheartedness. "Seriously, John, the meeting was very beneficial to everyone, since several issues were

uncovered that otherwise would never have come up. For example, a problem with the coiling of engine number two was observed in the statistical control worksheets. The control worksheet was placed by the tester, one of the last cell machines, where the electrical parameters of the engine were measured. The workers knew the problem and supposed it was caused by the coiling utilities. Before the cell was formed, the engine coiling and the assembly processes where the tester was set were done in different locations. When this randomly appearing problem was identified during the assembly process, there usually were over 100 engines in stock. After the cell was formed, there were only 10 because the coiling and assembly processes were integrated, so the problem could be easily detected. When the problem was first identified in the cell, the whole process was stopped, including the page_285 Page 286 coiling. Since the cell was starting to deliver poor quality products, it made no sense to continue production. Stopping the line manifested the full measure of the problem. Now it could not be hidden. In contrast with the former manufacturing approach where the entire production line could not be stopped and defective components continued making their way into finished parts, now production stopped immediately when a quality problem was identified. The attention was laser-focused on the coiling utilities, and the cell continued working once the problem was resolved." "But the issue was revisited in the meeting," I commented. "That's right," answered Klaus, "basically because the process was not reliable enough. And it could happen again, but with everybody's help, we reached the root-cause of the problem— a machine design problem that introduced errors while bending copper wire for smalldiameter coils, as was the case of engine number two. We would not have been able to find the cause without the combined know-how of the workers who knew their machines insideout, the business manager, and the equipment maintenance person." "What actions were taken as a result?" I asked Klaus. "Basically, there were action items for everybody to do. Maintenance had to cooperate with the workers and later with Engineering in order to modify the coiling machine. Workers had to pay special attention to the statistical process control worksheet in order to verify that the tolerance modification resulted in an overall reliable process. "We have held total-quality meetings before with workers from different sectors in the company, but we were never able to reach such concrete and actionable results as they do now. Generally speaking, the old meetings were ineffective because they were not focused or directed toward a specific improvement issue. Now we have groups of people in the cells responsible for a total process, not just machine operators. The degree of synergy that is obtained by the cell team reflects more than just a new work approach; everyone can sense that. Most importantly, they are very focused on the process they have in the cell, and on making sure that the needs of their team are being met, rather than individual needs. This is also an improvement over the old culture, where they were always trying to improve their own process. It's like their page_286 Page 287 brains are working to both produce and improve at the same time, guided by the feedback they get from the various statistical charts and cell diagrams." "That is right, Klaus," I answered. "The most important output of this transformation in the factory is not just the productivity gains; these are a byproduct of the structural and physical arrangement that enables the worker teams to own their processes and, through adequate incentive systems, to integrate the human minds and focus on the improvement of that process. The real gain is in the capability generated in the company to self-organize now and in the future when new conditions emerge. This self-evolving capability of the organization is aligned by processes in a way that looks and feels more natural than in the traditional organization, and it promotes relationships within and among the cells." Advanced SocioTechnical Systems

"Somehow," replied Klaus, "the old ways were justified in the minds of our workers and reinforced, perhaps subconsciously, by our own managers who didn't know any better than to view manufacturing work closely tied to a machine, a press, a lathe, a bench. The machine operator concept implied that human beings were just an extension of plant and equipment. Within that rigid structure, roles, responsibilities, and work design improvements also revolved around the old machine/human concept. Neither labor nor management knew the impact of that machine upstream and downstream in the manufacturing process. No one analyzed the total system." "That's a great observation. But can you tell me, from your role as manager of Human Resources, what else you see in this change that empowers the human being in organizations?" "Well, John, after our dinner conversation a few months ago, when you planted a seed regarding leadership, organizational learning, and emotions in the modern workplace, I did some research and came to the conclusion that my role needs to expand to fully support the new organization paradigm." "How is that so, Klaus?" I asked. page_287 Page 288 "After I redesign the obvious support processes to handle the day-to-day recruiting, hiring, and compensation and benefits, I need to integrate the areas of human development, organizational development, and performance management. I need to set up new processes and perhaps start to 'cellularize' the HR function that should still remain centralized due to its policy-making responsibilities that cut across all labor sectors—professionals and management. I also need to start to support competency requirements and talent development that closely align to the cell structure of the rest of the company. What I am talking about specifically is the creation of knowledge management systems to capture and promote innovation arising from the work of the continuous improvement teams—provide seamless training to the entire company, including labor, professional, and management, and start to groom new leaders through an in-house school of leadership that is closely aligned to business goals, performance management, succession planning, and the natural steps of leadership evolution." Klaus finished his sentence, and waited long enough for me to jump in. I knew from our previous one-on-one meetings that Klaus was telling me all this but at the same time was also asking for my validation of his thoughts. Klaus was a good and intelligent man, but like everyone else, he had a weak side—insecurity—and this was a leadership development opportunity for him. I made a mental note to work with him on this later. "Klaus, I have to congratulate you on the leadership you have demonstrated in this area. You are absolutely right on what needs to be done, and you're already well under way to elevating the Human Resources organization in this company to world-class levels. I would encourage you to write a proposal with your ideas on human resource and organizational development to present to Martin; I know he will be delighted to hear what you think." My remarks had the effect I expected; I was sure Martin would be hearing from Klaus within the week. "Let me ask you something else, Klaus. In this alignment of HR support you speak of, where do you think the new organization is heading that you need to follow?" "Our workforce is becoming more sophisticated," replied Klaus. "Now they dominate the manufacturing process for the page_288 Page 289 entire line, upstream and downstream. Everyone knows the state of each place along the line and the consequences of one situation or action upon the rest. Besides, they are not alone in the cell: Teammates work in synchrony with each other, and their cell works in synchrony with other cells. The important thing now is to consider the results of the overall process, and not of the machine. That is why individuals are measured by their contribution to process improvement—not measured by number of widgets. Output measures such as

number-of-parts produced apply at the cell level. The result is a vision of the factory in which you can now look at the collection of mental nuclei (the cells) focused all day on the improvement of its process." "That is right, Klaus. These are organizations designed to learn fast, to problem solve in real time, and to evolve in a much more autonomous and pragmatic way than before." "It sounds paradoxical," commented Klaus. "For years, we've made great efforts to get people to collaborate with ideas. We gave them courses on quality, on leadership, and on continuous improvement, with very few tangible results. We adopted a pure rational approach that neglected the organization and the individual needs. But with Phoenix, we are taking a different road. We are now addressing the strategic and tactical problems together, looking simultaneously at the structural, functional, and human dimensions. The factory concept was designed in an almost engineered way, changing the entire layout and the way of working. And we also refocused the organization on our basic key processes; through deep structural changes in the work flow, we went from the physical (function and structure) to the mental (reason and emotion)." I replied, "It seems that when talking about the process, people need to see it physically first to make it seem real. A virtual team—a dispersed group of people working on a process independent of each other, without face-to-face contact—can help accomplish a task or even improve a defined process. But since it is a virtual team, it tracks the minute-by-minute follow-up of their actions and ideas; there is no visible synergy." "And let's not forget their sharing feelings and the emotional synchrony that leads to positive team emotion," said Klaus with confidence. page_289 Page 290 "That's absolutely right. The physical closeness achieved in cells that stay within the limits of optimal human dynamics helps the team to feel both individual and group emotional states, and to better apply coping or reinforcing mechanisms through which team emotion can be self-regulated by the group. And by the way, Klaus, these mechanisms vary according to context and circumstances embedded in the dynamic routines that reflect the tacit norms related to feelings and emotions that exist in the team. The essence of these group norms, embodied in the dynamic routines that self-regulate team emotion, is in fact the foundation on which teams build their team emotional competence." Once again, Klaus and I were sharing that comfortable space in our collective consciousness where shared interests live, and had I not made ourselves aware of the time, we could have stayed there for hours. "Finally, John, I believe that the essence of human nature is being recognized here. In a social and technical system, such as the cell, the individual can get involved in a work structure that not only contemplates technical interests, but also takes into account the delicate understanding of the human psyche. The traditional work system favored technology and isolation. The cell organization tends to human relationships," said Klaus. "Yes, that is one of the most important added values of this change project—to rescue the emotional essence of the human being in the organization and place it next to reason, as the building blocks of this company's social structure," I concluded. "How are the new office cell meetings coming along?" asked Klaus. "They are making progress, but in a different way. Always with the same purpose of continuous improvement, but instead of having action items dealing with machine adjustments, setup procedures, or engineering, the office cells have other topics come up. Examples include improvements in cell support information systems, improvements in the procedures for customer or supplier relationships, and improvements in cell-to-cell synchronizing procedures. This last area, of course, is not as clear cut in the offices as with manufacturing cells, which need to interact in more predictable ways." page_290 Page 291 "And how did you feel about the meeting climate?" asked Klaus. "I attended a few meetings of the cell dedicated to the customers in the southeast area of the country. Other participants were the business manager, members of the team, and a

person from information systems. "The meeting was facilitated by the business manager, and like the improvement meetings at the factory, cell performance indicators were brought in. A customer satisfaction survey had also been completed. Items such as level of attention received, reaction rate, and information mistakes were rated separately. The satisfaction index had been 5 percent lower than in the former meeting, and the business manager wanted to know why. Was it just an anomaly, or was there an actionable reason behind it?" "Was the average percentage similar for all clients?" asked Klaus. "Generally, yes," I answered, "except in the case of a customer who had given an unusually low rating for 'rate of response.' The customer had requested a machine with unique specifications, and instead of sending them the current price of the equipment within a week's time, as was the lead-time objective, it took double that time." "Did they find out what happened?" "Yes," I replied. "Apparently the information system that tracks lead time for each customer was being done in each cell for each customer and for each process activity. For that customer, engineering times were longer than normal and that was the cause of the long response time." "I imagine that the cell person or persons covering that function explained what happened," said Klaus. "Apparently the customer request was confusing, and one of the members of Engineering had to accompany the salesperson from the business cell to the customer site in order to clarify some obscure specs. The customer reacted negatively, and more than one meeting was necessary to clarify his exact requests." "What was the conclusion, then?" asked Klaus. "One of the proposed solutions was to identify a technically savvy interface for each customer account. In this case, the page_291 Page 292 problem could have been avoided if the contact person had come from Engineering and not Sales. Had there been a relationship established between the cell's engineer and the customer's engineers, the issue would have been solved that same day by phone or e-mail," I answered. "This approach to building relationships with clients is valid for the other functions of the cell. Accounting people from the cell should interact with accounting people from the customer to solve issues related to contracts, payments, or debit notes, for example," said Klaus. "That is right," I answered. "The business manager proposed that scheme in the cell manager meetings." "I wanted to ask you something else," said Klaus. "Why did the customer represented by the owner of the company rate the response time badly, in spite of the efforts made? Weren't they made aware of our situation?" "Apparently the feeling of dissatisfaction did not go away. We don't know why, but the business manager is meeting with the owner next week," I answered. "Do you mind, John, if I play devil's advocate?" asked Klaus. "No, Klaus, of course not. Let's think about this together." "Virtual" Cells Klaus had an idea. "Suppose that instead of having a cell dedicated to the southeast customers, we left intact the functional departments in the company and we implemented a workflow guidance-type system so that the activities of a process crossing different departments were directed toward each consecutive activity once the previous one was completed. Couldn't we have done a lead-time follow-up, just like in a cell? What's the difference?" "If all you want to do is lead-time follow-ups, it is possible to do it in a purely functional organization using something like a case management system to track lead times. But the lead-time shortening is what's essential, not just the follow-up capability, Klaus. There is a self-imposed limit in a functional organizational structure that needs to be removed. For example, in the old page_292

Page 293 structure, information would be flowing fine from one department to the other, but at some point, one department becomes a bottleneck in the process chain: Electronically flowing information between departments would begin to queue, waiting to be read. And eventually, the total lead time would be longer. And you would know about it, but there is not much that one can do to accelerate a process in a monolithic functional structure." "That is clearly the case, John," said Klaus. "But I will go on playing the devil's advocate. Suppose you reclassify people's roles within a functional area, say a Sales Department, and virtually group those people in one department by customer geographical area, and then tell them. 'Give priority to the information you receive from your virtual partner from another department such as Marketing or Production.' Wouldn't that make things more agile without having to reorganize into cells? You'd be virtually designating cells that cut across departments, yet they don't have to share the same space." "Of course, it could be an improvement over the pure functional bureaucracy, but what would happen if the Accounting person was saturated with work from his or her own department and asked the person assigned in his 'virtual cell' for help—for example, ask a person in Sales Administration to review a spreadsheet balance? Assume that the person in Sales Administration can enter the Accounting function screen on the system to do this. What do you think would happen?" Klaus remained silent as I answered my own rhetorical question. "Here is what I have seen happen in cases just like this one: (1) No matter how we look at it, lack of face-to-face interaction cannot produce a cooperative system as you get in a cell environment. (2) That aside, the two individuals, no matter how good-natured and willing they are to help each other, report to two different functional bosses who have two different jobs (one controls the finances, the other moves the products out the door through sales). (3) And most critical these two bosses have no way of knowing the overall business driver for the need to cooperate at that specific point in time, nor the possible consequences of not cooperating between departments. I can tell you without question that no traditional company I dealt with had a compensation or incentive page_293 Page 294 system based on anything other than productivity and profits, and there is no problem with that other than they are blind systems oblivious to the need that those two employees from different departments have at that specific point in time. In addition, there is a possible negative impact on exactly those two elements: productivity and profit. By having a business manager in a cell structure with well-defined process responsibilities and accountability, not only do you remove the physical barriers to cooperation, but you also ensure that the motivation to cooperate is also present. "Imagine how workers feel if they cannot help each other due to departmental isolation and misguided management motivation. Would they feel like business people using their common sense to get the best possible results, or would they feel like helpless puppets caught in the wheels of an organizational structure that is bigger than they are? This also goes for the two managers who would like to help each other but can't because of deadlines and pressures that are bigger than the two of them. And when the lead times grow, who is accountable? Of course every functional manager is, which effectively means that no one person is accountable. "If the billing falls through," I answered, "the Accounting manager could easily point a finger to Sales and Administration, and vice versa, causing more customer dissatisfaction. And then, everyone is a loser." "I agree, John, and your argument is solid. Not only do we need to clearly delineate our basic processes, but we have to have only one person responsible for their execution: the cell business manager, or any name we want to give him/her," said Klaus. "I know some companies have created 'process owner' positions, but leaving the workers locked into an organization built not on process-cells but on functional silos reminds me of being in a lifeboat after a shipwreck without a sail or a paddle: Yes, you might survive for a while, but

everything else is unknown." Human Development in the Self-Evolving Organization "Creating the stage for a cultural and organizational transformation like ours," said Klaus, "is much more complex than designating page_294 Page 295 a person to be the business reengineering manager or total quality officer in a semipermanent position and expecting them to figure it all out on their own. I don't think that the tail will ever be able to wag the dog, although some companies seem to expect it. But on the other hand, a well-developed workforce that works with good leadership and has the support of the president and everyone taking responsibility for their own destiny is much more likely to grow the company, maintain or create new jobs, and make everyone happier in the process. I have learned a lot here in the past few months, John. I practically had to change everything I had done with a lot of effort in the past two years, from organization and facility layouts, to new roles, to revised compensation and incentive systems, to the way we think of training and development. Since we started Phoenix, it feels as if someone just turned on the lights and we can see what we are actually doing for the first time, and what we really need to be doing instead." "Tell me, Klaus, how was training and development organized here before Phoenix?" I asked. "You know, John, since the human resource objectives were so unclear, so was training and development." "What do you mean by 'unclear'?" I asked. "I mean that the strategic objectives in general were, and some still are, very ambiguous. Our 'people strategy' reflected the same ambiguity. If sounded more like a wish list than actionable goals—goals were hard to delegate to one person and when shared by many, there was no real accountability. Without well-defined and repeatable processes, it was hard to measure productivity and identify deficient areas. How can you set reasonable training goals in such an environment? Consequently, I believe that the tools to establish and achieve realistic learning objectives did not exist here, so our training was not focused. But we kept very busy sending people to classes; sometimes it was fruitful, but other times it was not. They were 'random acts of training.' We tried to enroll people in workshops, seminars, and courses on our main subjects. We offered in-house training and training outside the company. We allowed employees to propose the courses they liked to attend, and some managers sent people to specific courses they selected. And with great efforts from my staff, I met my goal of offering at least page_295 Page 296 five classes per person, per year, but I cannot honestly say what value that brought to the company." Klaus paused for a few seconds before continuing, since I kept quiet. "But now all that is changing. We gained precision in company processes, had clear goals with responsibility and accountability in each work cell provided and more cross-training opportunities, and we now had the ability to introduce technologies for learning on-demand over the Internet or through interactive digital video CDs. Because of the increased responsibility workers have within the cells and the accountability to perform well in front of their team-mates, they call me up to ask for such and such training, whereas before, I had to push them to enroll, remind them to show up, and then shove training down their throats." "So now you gained precision, right?" I asked. "Exactly, John. We can now work with precision. Training is aligned to real business needs. To use a gun analogy, I used to use a shotgun with hit-or-miss results. Now I use a rifle and I am becoming a sharpshooter. I know the specific training and development needs for each person as a function of the new organization, and I can create individual development plans that tie to their performance evaluation. Training and development are now a part of the

total system, and although talent development remains a centralized function, the management of learning now belongs in the cells, since every worker and every business manager is now a trainer and a coach to his/her peers. We traded the subject matter experts (SMEs) for 'Practice Masters.'" "Are people embracing this new role?" I asked. "Well, yes, but not everyone in the same way. It varies with how comfortable they feel with the type of work they do and their ability to communicate. But there is no question about the willingness to share their knowledge for the good of the team. Besides, they don't see it as training or coaching in the traditional sense; they view it as part of their jobs, and I am perfectly fine with that." "What other differences do you notice, Klaus?" I asked. "Another difference is where and how we get our training requirements. Since I was getting so many calls from the cell teams right after they finished a continuous improvement meeting, I am now sending some of my staff to those meetings at least once a page_296 Page 297 month. As business managers get more familiar with their responsibilities in the cell and start to work to develop the team skill-sets needed to meet their production goals, more and more business managers are starting to send their people to our career and professional development assessment centers. For many factory workers, this is new. Some are skeptical of training and others thought that these centers were not for them, so we will change the name to make it more inclusive. We are also creating a new workshop called life-long learning that everyone has to take that focuses on learning-how-to-learn to get people better skilled, more knowledgeable, and more marketable. Our self-directed learning plans, for those who choose that route for learning, start them at their level of proficiency, and focus on subject areas that are agreed to by the manager and the worker, with input from our HR career counselors. "We will still offer general classroom courses in work-related disciplines for professional and career-development purposes. I am currently drafting the training schedule for next quarter, jointly with the business managers in their weekly meetings," Klaus continued. "Little by little, I am putting together the skills and competency profiles for all jobs in the company. Once this is done, an HR improvement team will create a centralized skills database for the entire company to draw from. The HR improvement team will also look at creating, with the support of the systems development group, a best-practices knowledge base for all functions across the cells, including leadership behavior/events. The goal of our knowledge system is to enhance the interaction and communication among the functional communities of practice that now exist spread across the cells. A secondary goal is to provide a vehicle to capture knowledge as it emerges constantly in the day-to-day activities and through the input of the cells' continuous improvement teams—in short, to act as a repository of our company's intellectual capital," said Klaus. "Does all this include the employees who remain outside the cells in centralized functional sectors?" "Oh yes, John. The people from centralized sectors, such as mine in Human Resources, are oriented to specific training in their page_297 Page 298 disciplines, but all in the context of a cellular functioning organization. For example, our people are encouraged to better understand group dynamics and to get certified in coaching and facilitation skills, as well as to learn how to use a variety of human development assessment instruments," said Klaus, as he fumbled for something in his attaché case. "The System personnel are being trained on how to manage the 'cell net' configuration with more efficient Web tools, and the Finance people are figuring out ways to accelerate the conversion to activity-based costing (ABC) and budget management systems for each cell, while implementing the software packages with the help of the vendor."

"Well, Klaus, I am very impressed with the progress and with your future vision of Human Resources in this company. I believe everything is constantly changing, but today we can say you have a dynamic organization, in continuous evolution, that is humanly capable of meeting the requisite variety posed by a sophisticated global industry. You, as a company, are doing exactly what is needed to increase the degree of utilization of the human capital, as well as care for the individual's mental and emotional well-being." I congratulated Klaus again on his work and his dedication to this project as he continued to shuffle through papers on his desk. "Oh, here it is!" he said to me with childlike satisfaction. He handed me a draft document bearing the title "Human Resources: A Vision of the Future" and the words "Phoenix/HR Improvement Team" on the bottom. "Look, John, I've talked to Susan, Arthur, and Robert about ways to expose all of their managers who have two or more direct-reports to the same training on human resource development skills that my staff is taking. Just as with training and coaching within the cells, I feel there is a great deal of overlap in the human development competencies required by the leaders of this company and my HR staff. In addition to that, I want to start a Leadership Institute that will be the collective conscience of our top management and help us move beyond this transition phase to continue to focus our leadership skills on people, processes, and results. It's all in that document I just handed you, John. Please take a look at it; we would like to discuss it with you at our next Phoenix/ HR Improvement Team meeting." Klaus turned to say page_298 Page 299 goodbye to one of his employees who stopped in on her way out to say goodnight. "It will be a pleasure, Klaus. If you don't mind, I'd like to take this home and study it so that I can have a meaningful discussion with your team. I look forward to learning from all of you. And thanks for inviting me!" We walked out of the building together, and I said to Klaus, "Let me know if I can be of help to you as you prepare to present this proposal to Martin." "Absolutely, John. That's one of the agenda items for the HR team meeting you are invited to attend next week. I want us to present it to Martin as a team, and you are a part of it now. A lot of the ideas in that draft came from the HR staff anyway." On that last note, we said our good nights and went our separate ways. page_299 Page 300

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Page 301 9 The Future The Most Difficult Thing to Understand is the Human Heart, and It's the Most Valuable The following morning was uneventful. I broke the routine of being in my office by 6:30 a.m. to have breakfast with the family. I sent the kids off to school, said good bye to my wife, and left the house in a hurry to attend a meeting with Martin a little later. The kids had asked me to take them to one of their favorite picnic areas by the river that weekend; I agreed and quickly wrote it on my agenda lest I forget again. I quickly got on the freeway around midmorning. The rush-hour traffic was over and only a trickle of cars was still moving with unpredictable destination. I started to reflect on my life,

the family, and the project. My aim was to work six more months to complete Phoenix. I wanted to act consistently and not betray my ideals; I had told my wife that the next project I took was going to be more relaxed, and that I wanted to slow down a bit. But I also wanted to find a way of transmitting the cellular organization concepts to a larger amount of people and companies. I was personally convinced that ultimately, the evolution of companies, and in general all institutions regardless of a profit or non-profit orientation, would eventually find the natural path toward a process-based organization; it is only a matter of time for common sense to prevail. I knew the change was not easy, and being perhaps the most dramatic transformations performed by any company or institution, some would not make it and perish or be absorbed by companies that operated from the heart. Practically, nothing remained as before: there were changes in page_301 Page 302 working procedures, information systems, incentive systems, hierarchies, technology, but most importantly, the recovery of the human conditions that organizations lost somewhere along the way. The change, or sometimes the rebirth, of this human condition meant breaking down deeply rooted subconscious basic assumptions about managerial command and control behavior, adaptability, and inter-personal dynamics. But the best intentions to change a traditional organization are stymied by structural issues that work against it, like the overly hierarchical, monolithically functional, traditionally managed organization. No software package can address these barriers effectively; the best technology for transformation is still the human brain. As my academic friends would say, "I'll take a carbon/neuron-based inferential engine over a silicon chip-based search engine anytime." The new organization scheme based on processes and cell-teams gives the human brain the best chance to develop, innovate, and change new ideas into reality. If we looked at our change like any other investment, on one hand are the extraordinary results that are measured as a function of the cellular organization, and on the other hand are the intangibles that are harder to measure. How much would the president of a company pay for a change that represents even a modest additional 10 percent of the mental energy invested in the company by his collaborators? This additional margin of mental energy, when translated into creativity, innovation, and business focus, could represent a much greater competitive advantage than, for example, having the latest technology available. Technology can be purchased or copied (in the case of methods and techniques), and each improvement or upgrade implies larger and larger expenditures. The only things a company will never be able to copy, purchase, or borrow from another—as fast as one can buy or copy technology—are the culture and mental energy invested by its employees. Total quality programs tried to rescue somehow that mental energy from the traditional organization, but they failed due to a lack of management focus and time dedicated to change projects by their people. Creating a continuous and permanent innovation page_302 Page 303 and improvement environment is the most powerful intangible benefit that a company can decide to pursue. But that environment does not work without an enterprising spirit (a team emotion), without proper incentives, and without a culture (type of leadership and relationships) that stimulates an open mind and a continuous flow of new ideas. The challenge addressed by the cell organization consists of linking the various elements of change—individuals and groups or teams, culture and organization, systems, processes, and technology—around coherent social and technical schemes that stimulate permanent evolution and improvement. This results in a new system that starts and ends with the human being, based on individual respect, mindful of human potential, and resting on group action and behaviors. The companies that already apply cell technology, both in the factory and in the office, also see tangible benefits that were impossible to achieve before. But in

addition to all this, the greatest value of the cellular organization was the creation of an intelligent organization. I was pulling into the parking garage in Martin's building. I tried to clear my mind and concentrate on the sequence of events that waited for me that day. First of all, I should not forget to send my monthly report to the client's head office. I had already collected information from each cell, and consolidated it in a master file. Later on that afternoon, I would meet with Martin and a member of the board of the parent company. This attention from the parent company was very flattering for both Martin and me. Cell Organization Applied to All Business Types "John, let me introduce you to Dr. Sara Miller," said Martin. "Dr. Miller is in charge of the general management of our holding company in other countries. Our parent company has just launched a new strategic vision that includes work teams, innovation, and intelligent organization, and I thought it would be interesting for us to have an informal chat with her over a cup of coffee. As you know, John, our parent company's holdings include several business page_303 Page 304 types and companies such as banks, insurance companies, government agencies, universities, and now supermarkets." "It's a pleasure to meet you, Dr. Miller," I said. "I imagine that maybe you are interested in how to push the contents of the vision down into an organization with ten times as many employees as this company, and eventually their implementation." "That's right," commented Dr. Miller. "I believe that the first step we need to take to make the vision a reality is to have among the members of the board a shared vision and a coherent understanding of words such as innovation and teamwork. "Just between us, Martin, it is probable that if we ask the ten individuals on the board what they mean when they use the term teamwork or intelligent organization, we would get ten different answers. For some of them, teamwork might mean collaboration, for others an open-door policy, and for still others, it might imply the existence of a unified database to share information about problems and innovations. Intelligent organization might be even more confusing: For some it might mean an integrated information system, for others, a technique for training or improving communication policies." "I believe, Sara," commented Martin, "that even if they reach an agreement on the meaning of the terms and a concise vision about what each concept signifies, the definition of 'management tools' that will be used to implement the concepts might not be so easy to agree on. Knowing 'what' they are is just as important as knowing the 'how'—that is, the way to transform concepts into concrete results. I'd even dare say it is more difficult, because of the flood of management tools that are the topic of discussions in board rooms, offices, and factory floors." "I am afraid that is the sorry state of confusion the business world is in right now," I agreed with Martin. "And to make a mistake in the 'how' implies that the company wastes time and money the wrong way, allocates funding inappropriately, and risks its human capital." "John has a strict definition of adequate tool to reach an objective," said Martin to Dr. Miller. He says it is the one by which you accomplish strategic goals in the shortest time frame and at the lowest cost, integrating processes, people, and technology. The choice of the adequate tool then determines the 'how.'" page_304 Page 305 "I would like to add," I said, "that the change project must also be comprehensive in its design and enterprise-wide in its implementation. A change project should not be limited to only one area of the company, such as the factory or the Administration sector or Operations. If a sector or area is left behind, there is a great risk of not reaching the desired

end results. Nowadays, if we look at any manufacturing or service sector company, we see it is inundated with processes. Some exist by design, such as the sales ordering, production, delivery, and collection processes. Others are not planned; they emerge by necessity and evolve in ways that are neither repeatable nor measurable. Some processes cut across different company areas and business sectors. Like the links in a chain, if one breaks, the chain becomes useless." "Exactly," said Martin, looking at Dr. Miller. "Apparently, it all depends on the election of the right tools for the job and their application to every area of the company in order to get a total revision of all inter-dependent processes in the company, eliminating those that do not add value," Martin continued. "As John will point out," said Martin with a smile for Dr. Miller and a wink directed at me, "this is where traditional reengineering stops. But even in a change project as comprehensive as Phoenix, one cannot catch by inspection all processes (visible and invisible) that make up the company or those processes right after the change project is completed. So what can you do to ensure success? Well, probably the only thing one can do is leave it up to the members of the organization to continue to change and improve processes as they go along with their work. But since the traditional organization does not have the 'intelligence' built into it to adapt and self-organize, one needs to go a few steps beyond traditional reengineering, and that is where process-based organization (PBO) and work cells come in," said Martin, as he paused to catch his breath. "Don't tell me!" exclaimed Dr. Miller. "Is that what you mean by an 'intelligent organization'?" "Yes, Dr. Miller," I said. "PBO and work cells build into the structure of the organization the necessary conditions for self-development: the continuous improvement of processes, problem solving, and innovation without another change project or constant management interventions—or intrusions, as the case may be." page_305 Page 306 "But there is more," said Martin, jumping back into the discussion with renewed enthusiasm. "You cannot catch the company standing still. There are processes involving people and tools that are constantly changing, even the culture is changing, but at a slower pace. The problem with traditional process reengineering, without the necessary structural redesign, is that it doesn't take into account time or the inevitable process evolution that I just described. It is only a matter of months—or years, if you are lucky—before the traditional organization structure with an inflexible culture starts to erode the process changes and improvements you introduced. With PBO and a cell organization, you ensure that the organizational capability to change and improve is engrained into the organization that in the short run increases productivity, saving your resources and efforts, and in the long run ensures the survivability of the enterprise," concluded Martin. "Very well put, Martin," I said. "I would only add that the benefits from this type of process redesign and organizational development are independent from how an organization actually moves from section to section, or function to function. The same principles apply, whether it is for auto parts, bank checks, mortgage loans, insurance claims, campaign funds, administration, or student registrations, in paper form or computer bytes. And one more thing, if I may add: Another difference from traditional reengineering is that you don't have to be 100-percent perfect in how you initially redesign the work, because the work cells will take over and perfect it for themselves going forward. Of course, it is an easier concept to explain with words than to have it working in practice," I concluded. "Won't you tell me why and how to do it, John?" inquired Sara. "The answer, Dr. Miller, is to use care and common sense. As Martin and I have learned, not everyone in the organization cares enough, and the so-called 'common sense' is not that common as everyone seems to think. It is difficult to implement, because a few things remain untouched in the organization." "Basically, Sara," said Martin, "it is done through PBO, which consists of reorganizing the company around processes and a new type of organization structure, the cell. The process and the work page_306

Page 307 cell containing the process are staffed with a cross-functional team of workers and specialists having all the necessary tools and technology at their disposal, as well as a business manager or team leader who operates the cell as a mini-company, sharing the same goal priorities that the company has and the same urgency that the company has to achieve business results—something that gets lost in the traditional functional/hierarchical organization when you go below middle management and sometimes higher, too." "Employees," I added, "have total control over their process within the cell, and since it is a small structure ranging from two to five or six people, any improvement ideas have a direct and immediate impact on the work. Also, the cell operates as a real team, working together on common goals and helping each other. All this contributes to positive interpersonal relationships and a sense of team identity uncommon in the old functional organization. Often, after the change, the cells start to develop a subculture that shares in the values and beliefs of the larger organization, yet develops its own 'personality' and emotional climate." "What we are saying here, Sara, is that the simplification of the mega-processes and 'cellularization' in work teams apply equally to office and service sectors as well as to engineering and manufacturing," said Martin. "One thing John mentioned earlier is that with cellular technology, the adoption of other management techniques is far more easy than before. For example, the implementation of activitybased costing (ABC) is dramatically simplified because many of the previous overheads are eliminated or reduced with cells. A similar argument applies to finite scheduling in the factory, because now fewer units (cells) are scheduled, instead of hundreds of machines and operators." The company cafeteria where we had parked ourselves was now deserted. Fortunately, the coffee machines were on day and night to accommodate all shifts, so we made ourselves more comfortable and continued our conversation. "This is a very interesting approach, and I'd like to know more, if you gentlemen don't object," said Dr. Miller. I had a feeling she was studying our body language to gauge our willingness to continue. "Let's have another cup of coffee. Since we do not have any more meetings today, please help me visualize how this page_307 Page 308 could be applied to other companies in the holding that are different from your company. For example, Martin, do you think the cellular concept could be applied to the company's bank?" "Yes, Sara, I think there are many ways to apply the cellular concept to a bank," answered Martin. "But it depends on the type of banking operation—wholesale or retail—and the product mix it offers and its technology. I could go on sharing ideas with you, but since you asked us to help you visualize this application, let's do a simple exercise with you. Let's compare and contrast our company's experience to what it would look like in a bank." "Can I help you, Martin?" I asked. "I think that bank branches can be compared functionally to our distributors. They have to keep a personal touch in their relationship with the customer. They take care of customer needs and requests as 'points-of-sale.' When it comes to tending to a daily need such as a money withdrawal, the branch takes care of it in person or through an ATM machine, similar to how our distributors operate as points-of-sale, taking customer orders and delivering our products. Is that right, Martin?" "Yes, but banking-centralized operations such as credits or loan transactions can also be compared to factory processes," said Martin. "Other centralized processes having to do with various transactions, such as credit cards, money exchange, clearing, etc., could be done there through the equivalent of factory cells. From what I know, Sara, a retail bank normally has more than 30 of these support processes, right?" Sara nodded and Martin continued. "A factory like ours is reorganized in order to integrate all the steps of one or several processes into cells, managed entirely by the team. In turn, the factory delivers finished products to the distributors and various other channels or outlets. In order to follow with our analogy," I said, "it is possible to have many cells centralized in one place to serve all the branches."

"Each centralized office cell could have dedicated responsibility for one or more branches. If the branch is considered just a point-of-sale, the centralized cell would manage the strategic aspects of the relationship with the customer. Credit-rating assignment, evaluation of the customer's accounts, and, of course, each office page_308 Page 309 cell would be related to the central location cells, as we are here to the factory, among other functions. In this last case," said Martin, "we can also talk about using cells for purely centralized sections, such as Human Resources or Marketing." "But the end result, if it works as in this company," I commented, "should be a dramatic shortening of process dead-times, higher quality and productivity, and a new business-like sense in the bank, where a business manager would have all the steps of the process under control." "And what about the insurance company in the group, Martin? Do you believe it is applicable?" asked Sara. "The concept is applicable to any organization that operates with processes, Sara," answered Martin. "And the truth is that all companies are formed by processes, whether they know it or not. After having lived the experience of change in this company through Phoenix, I am convinced that PBO and the cellular concept are not just a management 'flavor of the month.' It is all common sense, although it might not be obvious at first sight. I also believe it is an irreversible trend that organizations are starting to adopt. However, we must take into account that two companies that manufacture a similar product or service can still design their initial cells in a different manner. I believe the key to organizing a company in this way is to precisely define how to form cells in a particular company and how to create a sustainable human structure that is self-organizing, selfmotivating, and self-improving; in short, this defines the essence of the company's culture, it's organizational DNA. "Going back to your question, Sara, about the viability of PBO and cells in insurance companies, an insurance company has many processes that can be shared by one or more cells. The company would start by evolving from the current concept of division according to functions to a point where each cell manages all the steps of a process, from contacting the customer, to the assignment of the policy, to administration and collection. By having these cells directly facing off with a section of the client base, you will also achieve the goal of creating mini-insurance companies with entrepreneurial business sense that are fully responsible for their customer relationships." page_309 Page 310 "While we are still talking about service organizations, what about a government agency?" asked Dr. Miller. "Do you think the concept of process-based organization can be applied to the government?" "Dr. Miller," I answered, "in my opinion, government agencies and military or research institutions are ideal places to apply this concept. The mechanics of reengineering processes, infusing new technology, and organizing personnel are identical to PBO in the private sector. The biggest challenge, however, because of the holistic nature of our approach to productivity increase, has to do with human aspects. For example, politics and power in government agencies play an important role in public administration—not that managers in private industry don't deal with politics and power, but compared to the heavy hierarchical government bureaucracies, organizational politics outside the government are child's play by comparison. Also, the culture in government is less amenable to change for a couple of reasons: First, written rules, regulations, processes, and procedures are less flexible and difficult to change, and they are designed for consistent application throughout the entire administrative structure, compared to the industry policies and guidelines that allow for emerging innovation. The second reason is that governmental culture is deeply rooted in bureaucratic tenets of job descriptions, titles, pay scales, and incentives based on seniority entitlement (years of service), and not on actual performance and results. In short, yes it can

be done, but it is painful to implement and will be resisted by administrators who have no plans to leave their jobs anytime soon. At least that's been my experience, Dr. Miller. What's your take on this issue, Martin?" "I am looking specifically for the conditions that should be created in government organizations to improve their effectiveness and efficiency and to make their service more customer-friendly," commented Dr. Miller. "In principle, I agree with John," said Martin. "Obviously, government agencies are a very special type of organization. It is debatable, but I would also agree that there are inefficiencies because government does not have the stimulus of competition, and it is hard to prove inefficiency and waste of taxpayer dollars with actual numbers. What external force makes them more page_310 Page 311 efficient besides the voters' punishment at the end of an administration period? On the other hand, I understand that it is difficult to find an innovating business spirit in government when there is no tangible economic value and where any spirit that exists is crushed by the mountains of paper they generate and the armies of administrators that surround it," said Martin. "Let me add to that, Martin," I said. "If you take any government office—a mayor's office, an agency, or any public institution—you might note that it is buried in processes. And each process step involves passing through the different 'functional silos,' artificially isolated within that organization." "I think I understand," said Sara. "To apply the cellular concept to a government agency means basing all the organization on processes, not just a few token processes within a 'functional silo,' to use your terminology. I see the political and power struggles that anyone would have to go through to reorganize people across agencies to form more-efficient cells that cover the fundamental steps of at least the core process of a government agency." "A key challenge," Martin commented, "would be to find a way to create internal competition among agencies to provide incentives for people to perform better, but that must be accompanied by compensation structures and promotion criteria that do not force managers to reward high-performers the same as low-performers, as we just completed in our Phoenix initiative." "I have the impression that the relationship with the public," said Sara, "would be a potential improvement area: it needs to be much more personalized. When I transact business with governments, national or foreign, I realize that they are not much different when it comes to bureaucracy. There is never a single face for the customer. Normally, you are shuffled to other places or other persons in order to continue with the formalities that reflect the complexity of their hierarchical structures. I think that if you could apply the cellular concept to these agencies I have to deal with, all my problems would be handled within the cell, and I would get a faster and more direct service." "That's very true, Dr. Miller. Customer relationship is perhaps the most critical transformation area government should address," I commented. "I have had similar experiences as a customer of the page_311 Page 312 government (which we all are), and as a consultant or service provider to government agencies. I honestly believe that in the future, as Martin said, this approach to human organizational effectiveness will not be a passing fashion, but an irreversible social evolution that can use an understanding of how private business works to address public government issues, at the same time motivating personnel." "I know it is getting late, but I'd like to close our meeting with two short questions," said Dr. Miller. "The first one, Martin, has to do with our parent company which, as you know, owns textile and food companies. Now I think I have a clearer vision about how to apply the cellular concept in office settings. As to the Manufacturing sector in this company, was physically moving machines to form a cell an efficient approach? Perhaps the fact that you

have smaller machine tools made it easier to move them. But what happens when the cell requires larger machines, such as a spinning mill or a flour mill?" "In those cases," I answered, "you also apply the cellular concept with process and work team assignments, but without moving the machines. The cell team is responsible for an entire process, such as production, quality control, and efficiency. A worker stops being responsible for just operating a machine, and instead shares responsibility for the end result with his/her team. The team manages not only production, but also a series of indirect activities, such as maintenance, machine setups, quality control, and also scheduling at the shop floor level if Kanban is implemented. If there is no Kanban but there is finite scheduling based on the restriction theory, then it is much easier to apply the pull concept with or without the help of information systems, since the scheduling of products is not done through several machines, but only through a few cells." "I understand. Thanks," replied Dr. Miller. "The last question: How can we apply the cellular concepts to our supermarket chain?" "If you allow me, Sara, you should analyze the purely operative part of the supermarket (floor processes), then processes in the back-office administration, and then centralized offices," said Martin. page_312 Page 313 "Again using our company as an analogy," said Martin. "You could consider the supermarket outlets to be similar to one of our distributors, as a point-of-sale with its warehouse and related packaging/transportation logistics. In the warehouse, for example, you can apply the work cell concepts so that a team is responsible for the process that is performed there, from receiving supplies to the administrative aspect of shipping and control to even the placement of items on shelves. And if in the supermarket the warehouse is managed with a Kanban approach, the analogy is even closer: The cells would also include among their functions the supplier-order-entry, ideally electronically, when reaching the reorder points." "Kanban touches a critical aspect in the supermarket," I added, "since the income-yield capacity of this business is directly related to stock rotation. Correctly implemented, Kanban ensures 100-percent service and smaller stocks." "John, what do you mean by 'correctly implemented'?" asked Dr. Miller. "It means that you should not limit Kanban just to the supermarket warehouse," I answered. "The idea is to start with the supermarket warehouse, but in a second phase, establish a close relationship with preferred suppliers in order to better manage the reorder function automatically and further reduce stock-in-hand. The reasonable and natural way for a supplier to do this is through the creation of cells in their own plants or factories, with the reduction of machine set-up times, etc., in order to be able to deliver goods to your supermarket outlets in smaller batches without losing productivity." "And what about office sectors of the supermarket?" asked Dr. Miller. "In my opinion," said Martin, "that varies with the type of supermarket—wholesale or retail— and with its sales-points, its technology, and its culture. To give you an idea, Sara, one possibility is to manage all critical issues in office cells. Each cell could have one or more supermarkets or sales-points assigned to it, and its business manager would be responsible for earnings and customer satisfaction in that client sector." "Selection of suppliers is a fundamental issue," said Dr. Miller. "If each business manager chose a different supplier, you would lose the benefits of wholesale when negotiating prices." page_313 Page 314 "Yes, just like in our factory analogy," I answered. "The suppliers must be the same for everyone. In order to optimize stock rotation, the business manager must order with enough lead time, and Kanban is a great help in this area." "Obviously, there should also be centralized function—that is, not organized in cells," commented Martin. "In the case of supermarkets, the ideal situation would be to have a centralized logistic brain receiving the Kanban signal for each product in each sales-point, simultaneously with the supplier, to optimize freights and packaging for the entire chain's

logistical net of suppliers, delivery, and retail outlets." "The concept of PBO is revolutionary," said Dr. Miller. "It forces us to change our way of seeing things. What surprises me most is how comprehensive it is; it recovers both optimal efficiency and the best that the employees have to offer—their intelligence." "And their passion," added Martin. Future Relationships Between Cellular and Information Technology The next day, I met with Martin for breakfast to debrief him on a few remaining critical issues. We talked over two "hungry-man" specials and the mandatory large carafe of hot coffee. While we enjoyed our meals in the cafeteria, Martin said to me, "John, what do you think is the future of the relationship between cell technology and information technology? I kept thinking about that last night, since the board, as you know, has been pestering me about the technology budget, assuming that this year we will be overhauling all information systems technology. I've explained the difference between the two tools: PBO and cells are social in nature, while information systems technology is exclusively a technological approach. But I owe them a better explanation." "Look, Martin, if we project ourselves into the future, the human cell will still exist, with or without technology. Of course once the cells are established, technology support, such as CRM, is very effective. But CRM alone without cells has limited payback. As long as computer systems are not self-adaptive to dynamic page_314 Page 315 business situations or able to interact with clients as human beings and with human warmth, I think the argument is clear. But to answer your question, in the future, information technology will continue offering data accuracy and fast communication. But crucial decisions will still be made by people until some day when expert systems achieve a much higher degree of sophistication than what's here today." "I understand, but be that as it may, John, I am not totally convinced that it can happen," said Martin. "Today, our company has defined a competitive strategy based on fast production rates and continuous change. I believe this will always be a valid strategy. And if leading-edge companies need as a rule to continuously change in order to remain competitive, can the systems technology be made to gradually adapt to a new situation, and at the same time replace an individual's decisions?" Martin looked worried. He seemed genuinely concerned about the possibility of human obsolescence, and his prolific engineering mind did not ease a bit his anxiety over the issue. He was almost there in terms of understanding the magic in human potential as long as it was closely followed by some observable external manifestation, such as the new behaviors he had witnessed first-hand on the shop floor of his factory. His positivist upbringing tended to keep him in the dark, however. My last resort was to try to change the context of his deeply engrained thinking, point him in a different direction, and hope he becomes a different kind of observer— someone who can be the lens for a new reality for humans. "Now you are getting philosophical on me, Martin. Listen, what you are talking about are not machines that process data, or even the 'carbon-based inferential engines' my computer science friends talk about, but rather a wisdom machine . That is what is required to enact the type of change we are talking about in the intelligent cell organization: humans changing themselves—or better yet, a human structure made of people, processes, and tools continually evolving. For a machine to do this, it most likely would have to be able to redesign its own circuitry over time, to reprogram itself every day with every new encounter using data of all types, but above all, to be able to wonder. I believe it was Socrates who said that wisdom begins in wonder, and I have yet to meet a page_315 Page 316 computer scientist who is building a machine that can wonder. But on the other hand, I have

met many leaders and managers who built their own "machines" to do exactly that: redesign processes over time, change every day with every new encounter with the world, and be capable of wondering: What if we do this differently? What if we try this approach? Do you know what machine I am talking about, Martin?" "Sure, let me guess," said Martin. "Cells made of people, processes, and technology that use their collective brain to continually improve, change, and reprogram themselves. Am I right?" "Yes, but you are forgetting something," I replied. "Team emotion, of course!" exclaimed Martin. "Bingo! All that, and the cell in a state of continuous improvement," I commented. "It will always be a step ahead of information technology. As soon as a new idea becomes change reality standardized in the social side and is supported by information technology, another innovation 'jump' occurs, and on it goes. It seems that people working together in harmony are the only ones who can manage innovation stages." "Anyway, John, one item that is always critical is 'personalization.' It's my impression that personalizing the relationship with the client always results in a competitive advantage. And for the time being, that cannot be done by a machine." "There are good technological aids out there," I added. "For example, using video conference systems, a cell will be able to personalize service by communicating with its customers through video streams over the Internet." "That is right," said Martin. "When the use of video conferences extends to business clients, suppliers, and customers, just look at the state-of-the-art in video cellular phones. You may also be able to work with the concept of 'virtual cell' in office sectors, having different members of the cell working at their homes or other locations and still having face-to-face contact with each other, but with certain efficiency limitations, as we have already discussed." "Even though it would be necessary to physically meet, say once a month, in order to build and strengthen positive team emotion, this approach to 'virtual cells' is quite possible, but it will page_316 Page 317 require much better leadership skills than we have today. Leadership is easier in face-to-face contact, but that is part of the self-improvement of our business managers. Like our cells, they are works in progress, continuously becoming," I added. "It seems that in this entire scheme," said Martin, "the greatest scientific holdup is not in information technology, but in our understanding of the human psyche, individual and group emotions, and social relationships." "Yes, and don't forget our ability to listen and value true dialogue with one another," I added. Education with an Eye on Process Saturday turned out to be a very sunny day. The best picnic sites by the river's edge were being occupied first, and the kids ran ahead of us to secure a spot as close to the fish as they could possibly get. They loved nature, and so did my wife and I. I had decided not to think about work, but to sit calmly in my folding chair, look at the coming and going of the small waves, and enjoy the moment. I've always believed in the old saying that happiness is made of small moments . This was one of those moments, and I had every intention of enjoying it. Sometimes, our worldly afflictions make us forget that we are also a part of the beauty of nature. Deep inside, it is a matter of concentration—a contemplative practice that we should exercise every day to enjoy the texture, colors, aromas, and flavors presented to the senses by our life experiences. Susan and her husband had arrived. They were there with their family to share a day of relaxation with us. I walked over to their table to say hello and to talk a little. "Hello, Susan. Did you have traffic on the way over?" I asked, trying to steer our conversation to inconsequential topics. I knew quite well that until we had cleared the latest work issues lurking in our collective consciousness, however, neither one of us could enjoy

our well-deserved rest. "Hi, John! No problems getting here, and we're having a great time so far. page_317 Page 318 "You know, John, I've been thinking about several issues, and would like to run them by you," said Susan. "Go ahead," I said, resigned to getting them out of the way and at the same time satisfy my curiosity. Susan was a deep thinker like me, and her insights made for very stimulating conversations. Besides, our respective spouses and children were busy fishing and rowing at the time, and would not be there to resent our "shop talk." "You know how complex our cultural change has been. And it still is, but not so much because of the workers as much as because of middle and upper management. In fact, with so many managers with the seniority to lead cell positions at any one time, we could not find one leader in the company to fit the profile of a particular cell business manager." "Oh yes, I remember that incident, Susan." "I think that change is more complex in our company because we have to undo some of the cultural behaviors and knowledge we had, and adopt new ones. But wouldn't it be easier if we prepared ourselves for continuous change from the beginning, while we are young?" commented Susan. "Absolutely," I replied. "It would be much easier. An early education on processes, change, and innovation would probably have the same effect as we now get when small children play with the computer and later in life embrace technological change without flinching." "You are right, John. The first step should include teaching the young to think in terms of processes that include acting with feelings and emotions as early as elementary-school age," said Susan. "This is an important departure, however, from the constant hammering of method, logic, and pure reason that we subject our children to from the time they start to talk and express themselves symbolically through gestures." It was clear that Susan was really expressing a concern she had for her own children's education and the helplessness she feels when trying to single-handedly pierce the armor of our traditional institutions. "To think in 'processes' as you just described, Susan, takes time. Society teaches us to think in terms of 'functional generalities'—to break things apart until we forget that there is a whole to page_318 Page 319 which the parts belong, and that as a whole, the parts work differently than they do separately, based on presuppositions of cause and effect that might not be accurate. But to think of human organizations as wholes, based on interdependent processes, would require us to go through the entire chain of facts that makes up that organization, the context for making sense of those facts, and the values and beliefs that move and motivate people. I would say that the competency required to think in terms of processes—given the current state of affairs in most organizations—requires a new set of skills: skills to radically deconstruct functional, structural, and social critical thinking and use a systems approach to reassemble a better working whole." "For example, when talking about the independence of a country in a history class, thinking of history as a process would mean going through the facts within a given context, intervening conditions before and during a historical event, and then looking at the effects, consequences, and new emerging conditions after the independence. On the other hand, to think functional generalities means taking the independence event as an abstract entity in itself, not as a complex pattern of invisible forces manifested through interoperating social actions and behaviors, fueled by power concentration, diverse interests, economic conditions, etc." "I think I follow what you are saying, John," said Susan. "The problem with introducing change into the education system is much bigger than changing one organization in one social context. But wouldn't it be nice if we could do it?"

"I agree!" I exclaimed in reply. "What's interesting to note is that people naturally think in terms of 'processes,' and that is because reality comprises processes, and not isolated facts." "John, please explain to me what you mean by 'facts,'" requested Susan. "Well, in the context of what I just said," I replied, "'fact' means converting intangible social behavior, rational conscious acts and irrational emotional ones, into arbitrary measurable variables: for example, assessing customer satisfaction by counting the number of product returns, and inferring 100-percent satisfaction when there are no more product returns." page_319 Page 320 "Going back to your original comment about education," I continued, "another important possibility to consider would be to educate kids in teams, and assess a grade to the group to eliminate the individualist rivalry among them that is so engrained in the 'super-hero mentality.' The idea is to promote solidarity, teamwork, and interpersonal relationship skills, starting from kindergarten," I added. "Yes, colleges and universities pay exclusive attention to academic topics, but when the students graduate and enter the workforce, they lack the basic skills needed to succeed as contributors in a society that has no need for super heroes, except on TV or theater screens." "I agree," said Susan. "Through this type of education, we could achieve more cooperation among people, and that would have a healthy impact on life in relationships, because we need to understand each other's problems in order to help. But the reality of not having this kind of education and social upbringing means that it is important that we teach the basic concepts of human interrelationships to the work teams, from both a rational and emotional or affective perspective. "Do you imagine the potential of a highly motivated, cohesive team?" asked Susan. "I do," I replied. "It seems that the key to achieving that state of mind is having people be emotionally grounded all the time," I said. "What does emotionally grounded mean, John?" "It means that people live their work lives without resentment, envy, or sadness, at least in their business dealings," I said. "It requires that individuals learn to manage their afflictive emotions and that of others. When a team becomes emotionally mature, everyone strives to help each other achieve this emotional grounding. "Teams that are emotionally mature exercise this competence routinely to ensure the emotional well-being of every team member in a cell," I added. "John, do you think it is possible to distinguish between public work life and private lives when it comes to emotional states?" asked Susan. "It strikes me that an individual is his or her same self, no matter where he or she is." "That is true," I replied. "But in either case, the critical point is to recognize the feeling before an emotional outburst emerges page_320 Page 321 that affects the rest. If the business manager perceives how an individual feels, everyone in the team might be able to help cope with the feeling or sometimes stimulate a particular emotion, depending on the type of action or behaviors it originates from. Did I tell you about my 'motivational dashboard?'" "No," said Susan. "What is that—a motivational board?" "It is something I implemented before in the cells of other companies, and we might be able to apply it to your company. The motivational board is an actual display board, set up in each cell for everyone to see. Small badges of different colors are used to indicate the emotional state of each person in the cell. Upon entering his/her cell in the morning, each team member chooses a color badge according to his or her emotional state that morning, and places it on the board." "As you can imagine, not every organizational culture admits to using this type of approach to recognizing human emotional sensitivities: Some claim confidentiality and others just don't

need it because their culture encourages people to openly communicate. Those who are going through something emotional might just tell the group or ask for help without needing an "emotional board." In either case, it is important that their feelings be recognized by the group and taken into account when behaving and acting as a team." "So the motivational dashboard is like a thermometer," said Susan. "It allows the group to perceive a team emotional state of mind, and act upon it accordingly. And from what you said before, it allows the team to get involved with team emotion." "Yes, as a start," I responded. A Future with Cells and Team Emotion "So John, what will happen when the cell concept extends to the rest of the companies within an industry?" asked Susan. "How do you envision this network of relationships operating?" "The relationships for the transactional and tactical aspects of intercompany processes will likely be established directly cell-to-cell between the parties, while the institutional aspects, such as strategy and policy formulation, will still be managed company-to-company by higher levels in management. page_321 Page 322 "You also asked me how I envision the network of relationships operating in the future. Well, imagine a factory cell in company A in simultaneous contact with a supplier cell in company B and a customer cell in company C. Thus, transactions between all the companies will be faster and more direct. In addition to that, the person-to-person interaction adds a human dimension to what was before a faceless transaction consummated through papers going back and forth, waiting, getting lost, or being rerouted. An individual in a supplier cell would know exactly who his/her counterpart is in the customer cell, by name, and can expedite a process by e-mail or just a simple phone call. Paper will still be needed for some time for signatures and legal aspects of a transaction, until a business-to-business (B to B) system is built that can eliminate the paper documents. And as the business grows to include other companies and customers, so does the cell network supported by multiple interfacing information systems—a business-to-business model evolves (B to B for C)." "This is like going back to basics, but with technology," said Susan. "In the early days, when companies were small and dealings were more direct between business entrepreneurs, things were simpler and speedier. The growth in bureaucratic organizational structures came about because businesses grew more complex and needed to communicate, plan, organize, control, etc., with more people, no computers, no fax machines, no cell phones or beepers, and not even telephones—only layers of management with small spans of control, and mountains of paper surrounded by armies of clerks. Now technology is here, and human resistance to change still keeps the old structures." "I agree with you, Susan. It is like going back to the advantages of the small cell, but using office technology to maximize the productive capacity of the smaller nimbler organizations to handle the demands of global markets. Special-purpose information technology will gradually increase its support of direct and effective communication between global networks of human cells. The technology is there waiting for humans to apply it in this fashion; like the Internet technology that laid dormant since the 1950s, connecting universities and military research labs, until humans stepped up its application and launched in the 1990s the World Wide Web we have today," I answered. page_322 Page 323 "How long do you think it will take to realize the full potential of multi-cellular networks covering the world, John?" "That's a good question, Susan. I don't have a short answer to that, but since you asked, you will have to bear with me and my reflections. I am quite sure that the political boundaries separating countries, with their international laws and trade agreements, will be a determinant factor in the growth of what we can imagine as a 'World Wide Web of Cells.' It

is a matter of companies realizing the potential and becoming enthusiastic enough to tackle the hard issues about people-change in their organization. As the enthusiasm that germinates in the cells becomes emotionally contagious, it will spill over the boundaries of the firm, affecting suppliers and customers alike. Small clusters of cells, operating with emotional synchrony, will grow and continue to grow. Larger clusters of cells will expand beyond state lines, industry lines, countries, and continents, similar to the World Wide Web. Multiple cell-to-cell synchronic alignments of actions and human behaviors, taking in information and raw material and producing information and products, will soon establish synchronic, asynchronic, and resonating patterns of action necessary to both produce and self-evolve. I feel strongly that the different feelings and emotions that exist at any instant at individual, group, cell, and cell sub-network levels will drive the collective act of emotional display (productivity drivers) triggered by emotional contagion." "That is a very bold vision of a world of business transformed by a network of teams working in a web of cell structures: commerce with no boundaries, driven by teams. Is that right, John?" "Absolutely. If the World Wide Web shortened distances and communication around the globe to the point that some are touting it 'the global village,' I'd dare say that the 'World Wide Web of Cells' will transform the world of business, national and international, into a global team. The management techniques of this new world have to match it in sophistication. The transformation has to happen one cell at a time, company by company, until the World Wide Web of Cells emerges, just like the Internet did, designed by no one in particular and managed by everyone. The starting point for each company depends on their urge to make the change now and go through the complexities of modifying its processes, its technology, and its culture, or to delay until change becomes page_323 Page 324 inevitable, at which point it might be too late. The only restrictions I see lie in the reluctance of company executives to take the plunge. Very few companies have transformed all their organization processes into cells, and that is fine. There is nothing wrong with revolution through informed evolution. There are only a few good examples to try to emulate, and your company, Susan, is fast becoming one of them. In my opinion, everyone should approach this change in their own way. "If the company's officers are not in agreement or they think PBO is just another management fad or they want to change yet ignore the extensive support required for this type of change, my best advice would be to delay starting the project until a better opportunity arises." "In the end," added Susan, "those companies whose officers have enough confidence in their leadership abilities and trust their workforce to go through a turbulent transition period will at the end of the journey stand in a better position compared to their competitors. To base the organization on processes is the most complete way of incorporating, in an intelligent manner, the best management concepts in the organization." Susan seemed to speak with real conviction. "That is right, Susan. When you have cells, every new management tool that comes along can be evaluated on the benefits it produces to each cell—by the continuous improvement teams already in place. Change is now a part of every process!" I added with conviction. "Mom! Dad!" The children called us from across the field. "Look what we found!" Susan's boy and my youngest daughter approached the table covered in mud from head to toe, clasping in their little hands a pair of filthy live turtles the size of paper plates. Susan looked at me in horror. We were supposed to look after the younger ones, while our spouses and older kids were out canoeing. "I forgot about them, too," I said to her, feeling just as guilty. "Don't worry, John. We'll tell the others we're only human ." We all laughed with relief. Even the children realized that our grown-up reaction to their escapade was different. Change was already taking place for them. page_324 Page 325

10 Let's Say It Again with Feeling! The big conference room was quiet. The carpet was still undisturbed; I could pick out the chiaroscuro patterns crisscrossing the floor, left the night before by a cleaning person with a vacuum cleaner and a flair for the artistic. Everything had been set up for my presentation on team emotion and change. The overhead projector was ready at the front of the room, the mobile microphone sat next to the podium, there was a jug of water with a glass on the table, and 60 or more chairs were neatly arranged in rows of ten, six or seven columns deep. There was enough space between chairs for me to walk around the participants, something I preferred to do over standing behind the podium. The bustle of office activities did not start for another 30 minutes, which gave me plenty of time to hook up the laptop and do a few dry runs of my introduction from memory. No matter how many times I had been through this routine before, that anticipation of the group filled me with anxiety and exhilaration. "Good morning, John. Everything okay?" asked Klaus from one of the two entrances closer to the front. "I'm expecting a full house, since more than 100 managers RSVP'd that they are coming. Team emotions are running high around this topic." "Everything is in order, and I'm not surprised about the positive response; it's a good sign," I replied. Shortly after Klaus arrived, a very animated group of managers, directors, and supervisors came in and sat in the front rows. The room filled in no time, and late-comers accumulated in the back. I had already met almost everyone there, so Martin's introduction was curt and to the point. He reminded the audience why they were there, gave a brief progress report on the latest milestones reached by Phoenix, and turned the microphone over to me. page_325 Page 326 "Folks, my presentation is simple and will take about an hour, depending on questions. Everyone here has heard about team emotion, but has not heard exactly what it is and why you need to care about it." "You've already heard and used many words and phrases associated with this concept," I said, pointing to the overhead display. "Enterprise as a brain, people as neurons, liberating positive human energies, managing afflictive emotions, team synchronization as an orchestra, organizational harmony and fluidity, and spirit of the group or team spirit. Everyone has an intuitive understanding of what these mean, and for the most part, that is all you need. No words will effectively capture all aspects of team emotion or distinctly identify it from other concepts, except that you need a 'label' that everyone here agrees can be used to refer to a particular set of complex feelings and emotions and how they affect your work in the context of team actions and behaviors." Using "team spirit" as an example of an emotional label, I asked everyone in the audience if they use the words regularly. Then I asked a few managers to try to describe what they mean by the words team spirit . Although they used very different examples of team behavior, most agreed that the essence of team spirit is not about an object, but is a manifestation of a collective state of consciousness in the team. "There is really no such thing as team spirit, really," I challenged them, "unless you believe in ghosts. But there is, however, a team emotion that materializes in a team through collective acts of emotional display." "John! John!" a lady standing in the back of the room called out. "Are you saying that emotions and feelings are not the same thing? And what is a 'collective' act?" "Yes, they are different things, and research in this area supports that feelings are fundamentally private experiences or sensations of anger, joy, anxiety, etc., while emotions are the public display or performance of feelings, either authentic or simulated. I am not just talking about crying or smiling, but any and all premeditated, conscious actions and involuntary, unconscious behavior that responds to a feeling. When it emerges into public perception, it becomes a public display of feeling. Conversely, page_326 Page 327

you'd be surprised how much of what we label as emotions are in fact forced false emotional states that we perform in order to comply with social expectations, or simply use as a mechanism to help us control a situation. But what is important in either case of emotional display is the effect it has on the other members of the team," I responded. "John, I appreciate our need to develop an intuitive understanding, but could you give us a common definition to help us get started as a group, sharing the understanding of what we think of as team emotion today," asked Martin from the front row. "Yes, I can," I responded as I flipped to the next overhead. TEAM EMOTION IS… A collective act of emotional display triggered by emotional contagion. I asked everyone to analyze each word or term on the slide as a group, rather than assume they know what it means, and to then discuss as a team the meanings they agree on. Starting with "collective act," I continued. "Developing shared meaning for collective act might be tricky for some groups, but only until they come to differentiate that feelings are private and emotions are public displays of feelings. For example, if the whole team decides to attend a demonstration against the killing of whales, that is a collective act of emotional display of the shared feeling that they have for whales." "What John is saying," Susan chimed in, "is that even if a group acts separately and at different times but is motivated by a team emotion, it still is a collective act for the team." "That is right, Susan. But of course the resulting collective act could be good or bad for a team, depending on the nature of individual feelings and emotions that are being shared within the team," I responded. Klaus echoed my words from the back of the room. "You see," said Klaus, "when everyone is feeling the same way about something and each person emotes accordingly, such as about a new customer or a root problem detected in a cell, then you have emotional synchrony that turns into a team emotion for the entire group. The collective act that follows can be positive or negative, depending on whether or not it is considered productive or unproductive by the entire team." Klaus passed the microphone back to me along, with the control of the meeting. page_327 Page 328 "Why are we telling you all these things about team emotion?" I recaptured their attention and refocused it to the presentation. "The reason we're doing this is because the team's competence for understanding and self-regulating their team emotions is what differentiates successful teams from those of your competitor." The comment drew a small applause from the managers. I continued. "Team emotion is not just the feeling, but the feeling transformed into shared emotions in a collective act. The collective act is what identifies the group or work cell as a real team, and helps them produce, support each other, and openly learn as a team. Everyone here has seen what happens when a new group of people come together as a new team, haven't you? But are they really a team at that point? Not likely! There are lots of runaway feelings, anxiety, and emotions, and for the most part, people don't know how others feel about them, about themselves as members, and about the team as a working unit." "People have different feelings about their work, their organization, their surroundings; being together, being apart; having the right tools, desk, window or not; liking their manager or not and so on. As time goes by, some of these feelings are sorted out by the members and shared among themselves, or mimicked and intuited through emotional contagion. As more members of the team share feelings and emotions—they act according to a team-shared mental state or emotional state—the team then starts to behave and act as a group, in a particular way, and as a real team," I continued. "Team emotion—that is, the collective act that constitutes team —emerges when there is a high level of emotional synchrony that resonates by generating a series of behaviors and collective acts that respond to a higher consciousness than one's self. That is a real team, a high-performing one, a well-adjusted group of individuals that includes any type of human group: factory and office workers or professional and management groups who are

working together to accomplish shared goals." Someone raised a hand and I paused to hear his question. "John, what can we do as managers, and especially those of us who have cell business manager responsibilities, to make sure that positive team emotion prevails?" It was Arthur who asked the question. page_328 Page 329 "I'm glad you asked that question, Arthur, because that is the reason all of you are here today: to derive a practical use of this concept or idea of team emotion," I replied, directing my answer to the entire audience. "Team emotion comes up when the contextual or intervening conditions in which the team operates are the 'right' ones for that group. These conditions can range from interpersonal behavior and skills to organizational culture or to simply the history of feelings, emotions, and critical emotional incidents that the members of the group share. You as managers have the ability and the duty to create the most positive contextual conditions for team emotion to emerge. There is no magic formula; it is different with each team and each business manager. However, just like with the words that defined team emotion, the words used to define the context by which we make sense of our experiences as a team need to be discussed, analyzed, deconstructed, and interpreted by the team as a collective. Otherwise, there is confusion and misunderstanding." I asked the audience to indicate by raising their hands who felt comfortable doing this with their teams. Fewer than half put up their hands. "I don't fully understand what you mean by creating the most positive contextual conditions for team emotion to emerge," asked a business manager who had not raised his hand before. "Okay. Let me try a general explanation rather than a specific example that at this point might be misleading," I replied, alluding to the fact that each team is unique and must develop its own explanation (emergence of contexts) for it to make sense, rather than being told by an outsider. "The way it works with contexts and team emotion," I explained, "is that we behave and act in certain ways that are consistent with how we interpret what is going on around us. In other words, we don't act in arbitrary ways, but rather because we feel good or bad about something that compels us to choose one action over another. The essential thing to consider is that these choices are not always voluntary, but most of the time they are subconsciously made, particularly if you've been doing it the same way for a long time. So to modify human behavior and the action that obeys our collective subconscious, we need to speak to the 'language' of the subconscious, not just hand out rewards or punishments at the page_329 Page 330 action level such as compensation or demotions. Instead, positive team emotion is the 'language' that you need in order to work in teams." I saw a few heads nodding in acceptance of the notion of team emotions as the context that affects the logic of the team, which in turn drives behavior and action by the group. "As you know," I continued, "some have referred to these contextual conditions as the emotional climate or mood within the team . So, in other words, if the team members feel and share emotions to the point of acting them out in a synchronized way, all the behaviors and actions that result are oriented, like iron filings attracted by a magnet, to a collective act: for example, fulfilling an order, launching a new product line, influencing the organizational culture, implementing a new process-based organization, or just being the number-one company in the industry." Martin at that point started an applause that came to a crescendo and died with someone in the back cheering, "Let's go get 'em, Martin." "Folks, believe me," I said, recapturing the essence of that moment. "If team emotion exists in this company, the possibilities are endless. But why am I telling you this? Can't you feel it now, at this very moment?" Another short applause followed as a response. Everyone agreed that the climate was

different: the Phoenix project brought new hope to the company. I further explained the science and philosophy behind team emotion by going over in detail the Model of Emotion Dynamics. I reinforced the idea that each team had to develop their own emotional climate and their own sense-making context. As long as I was around, I told them, they should ask me for help whenever they needed guidance and practical guidelines for stimulating the cell teams to develop positive team emotion. "What happens with those teams that can work from home or are, by necessity, located in different geographical areas?" asked a plant manager. "Especially for dispersed cell teams," I replied, "team emotion is needed to maintain cohesion and meaning while the members are apart. But it is impossible to eliminate all personal contact. People who work at home must meet with the rest of the cell team with a certain frequency—not just to attend to work-related actions, but to dialogue with the rest, share new ideas, learn, reflect, and adapt page_330 Page 331 as a team: to reestablish psychological bonds that will enable them to work as a team while they are apart." I called on a young woman standing in the back, whose hand had been up for some time.

Figure 17. Model of Team Emotion Dynamics "John, regardless of team location, how do we generate that passion you spoke about at our cell team meeting? Or that positive team emotion?" "As a manager, you need to set the right context through a positive emotional climate. Then two things have to happen: First, people should all be valued for who they are , not just for how they do in a particular job-task. They are not always responsible if you, management, assign them to the 'wrong' job. And second, you must value the whole person . Just ask yourself how much talent leaves the organization because managers don't really value all the talents a person has to offer to the organization. Of course, this requires that you know what the organization needs are. As for generating positive team emotion, that is something the team needs to work out; you as a manager can control the organizational variables that can prevent

negative or afflictive emotions by talking to people and finding out what is bothering them. In addition to that, as long as the cell page_331 Page 332 teams exercise their autonomy, they will be able to find ways to help each other cope or reinforce team emotion. It is important that the team get used to reflecting on their experiences, learn from them, and adapt by changing or innovating. That is exactly the purpose of that continuous improvement team meeting you invited me to attend." "But why do we need to change so much to attain this?" asked a plant supervisor who was sitting in the front of the room. "The reason it seems we are changing so much is because we are making two changes at the same time," I replied. "First, we are changing the structures that get in the way of continuous improvement—the processes, the cells, and the leadership of business operations that are now in the hands of business managers within the cells. The second change is learning how to change—learning how to adopt new ideas, innovations, management techniques, information systems, and all the changes that will keep on coming as a way of life. Unless we do the first change successfully, the second doesn't have a chance. And these are the challenges that cells need to know how to handle from here on to be more productive and competitive so that the company doesn't have to go through another Phoenix project ever again," I added. Then I spoke about change from the relationship-building angle. "From another perspective, the magnitude of change seems menacing because we are changing the structure of the company from the traditional view where blocks of humans, isolated in functional silos, are connected only by impersonal transactions that hold together the boxes of the organizational charts, to a more dynamic variable structure composed of multifunctional and semiautonomous cells, connected to other cells inside and outside the company through the power of relationships and self-contained processes. In short, we are transforming a routine transaction work model to a new one based on business relationships, innovation, interplay, and exploration." "So what you are saying is that the cell structure gives us the autonomy we need to develop the new relationships necessary to adapt to the various faces and personalities of business change," commented another business manager in the audience. Martin jumped in with a reinforcing comment of his own. page_332 Page 333 "Yes, yes! That's correct. Through the cell structure, where face-to-face contact of the team members is possible most of the time using positive team emotion, the team can counteract the drifting away from the new order we are trying to adopt. Leaders who are sensitized to team emotion and emotional dynamics can create the proper context for team emotional competence. It is itself a collective act that emerges and propagates to other teams from positive team emotion. In short, we'll have cells made of people, processes, and technologies, using their collective brain to continue to improve, adapt to change, and reprogram themselves throughout the organization, and perhaps beyond our own organizational boundaries," said Martin. "By 'beyond ourselves', do you mean to our customers?" asked a purchasing manager from a centralized cell. "That is right," said Martin, now facing the managers. "When we finish installing the video conference facility and extend this technology to our business partners, clients, and suppliers, you might also be able to work with the concept of 'virtual cell' with them, having different members of our cells facing off with cell members from the client organizations, for example. I feel that this approach to 'virtual cells' across organizations is not only possible, but something we want to promote for mutual benefit. However, it will require much more leadership than we have today. Leadership is easier in face-to-face contact, but becoming cross-organizational leaders and influencers is a part of the cell self-improvement you'll be asked to do."

Martin was now standing in the front of the conference room. He had effectively taken over the assembly. We jointly answered a few more questions, and then Martin announced that this entire management group would meet once a month for discussion and continuous improvement. He explained that he wanted an all-hands-on-deck company meeting that would take place once a quarter in a much larger hall. Everyone in the company would be invited to attend live or through video feeds. Martin felt good: He had restored confidence in his management group. They were now a real team, and that was only the beginning. page_333 Page 334

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Page 335 About the Authors The authors became good friends during their college years in Argentina back in the early seventies. After successful careers in private and public sectors, their paths crossed again. Macazaga had just finished developing a series of case studies that reflected his many years of experience with PBO and business process reengineering, and Crosetto was about to defend his doctoral dissertation on the topic of Team Emotion in Organizations, and the impact on individual and group behavior when confronted with deep change; (a topic on which both have extensive hands-on experience, and numerous real-life examples). Although their careers evolved through different paths and in different countries, their experiences were surprisingly similar. They share many interests in common, including devotion to family and children, interest in philosophy and meditation, and an unshakeable dedication to lifelong learning and teaching. In fact, their experiences dovetailed so nicely, that they decided to write this book and become partners in a joint venture: Clever Output International, www. cleveroutput.com. Gus Crosetto is director of Learning and Development for Freddie Mac, the second-largest home mortgage company in the United States. He previously served as a director of Clever Output International, where he was actively engaged in research and consulting in the areas of organizational effectiveness, corporate learning, and leadership. Dr. Crosetto has also held executive positions at organizations including Fannie Mae, Sun Microsystems, Xerox, and the Argentine Air Force. He has been the director of numerous HRD programs, including programs on cultural and leadership transformation, management, and employee development. He holds an M.S. degree in Management Information Systems and a Bachelor's degree in Computer Systems Applications from page_335