Making Better Decisions - Understanding Fitness for Purpose, Aligning Capability with Strategy

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This is an update to my Modern Management Methods 2014 talk in San Francisco. It includes an example kanban system based on lead time distribution and demand analysis.

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  • Fitness criteria are metrics that measure things customer or other external stakeholders value such as delivery time, quality, predictability, conformance to regulatory requirements or metrics that value actual outcomes such as customer satisfaction or employee satisfaction
  • Fitness criteria are metrics that measure things customer or other external stakeholders value such as delivery time, quality, predictability, conformance to regulatory requirements or metrics that value actual outcomes such as customer satisfaction or employee satisfaction
  • Fitness criteria are metrics that measure things customer or other external stakeholders value such as delivery time, quality, predictability, conformance to regulatory requirements or metrics that value actual outcomes such as customer satisfaction or employee satisfaction
  • Delivery frequency also relates to quality. Poor quality will affect the customer willingness to take more frequent delivery
  • Median is always less than the mean and lies between the mode and the mean. Median is less sensitive to the tail on distribution and hence less variable in the presence of assignable/special cause variation causing a long tail. However, it is the mean that is used in Little’s Law and therefore we do care about risks that affect the tail in the distribution when using Little’s Law to forecast.
  • Median is always less than the mean and lies between the mode and the mean. Median is less sensitive to the tail on distribution and hence less variable in the presence of assignable/special cause variation causing a long tail. However, it is the mean that is used in Little’s Law and therefore we do care about risks that affect the tail in the distribution when using Little’s Law to forecast.
  • Making Better Decisions - Understanding Fitness for Purpose, Aligning Capability with Strategy

    1. 1. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Presents Presenter David J. Anderson Stop Starting Start Finishing Stockholm May 2014 Release 1.2 Making Better Decisions understanding “fitness for purpose”, matching capability to strategy & objectives
    2. 2. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Blizzard Skis
    3. 3. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Mittersil, Austria Blizzard Factory
    4. 4. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Blizzard is the largest private sector employer in the Pengau Alps region of Salzburgerland, AustriaMittersil is a factory town with over 400 people relying on the factory either directly or indirectly for employment
    5. 5. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. • Since 1945 • Hand-made by craftsman • Innovator • Award winner
    6. 6. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. In 2007, Blizzard, effectively bankrupt, faced closure from parent company, Tecnica in ItalyToday Blizzard is the most effective & efficient ski manufacturer in the world!
    7. 7. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. What went wrong at Blizzard, a proud & leading brand in alpine ski equipment?And what enabled a remarkable turnaround, from the brink of extinction to a return to innovation & profitability?
    8. 8. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Orders & Deliveries of Skis 2006 winter skis delivered to dealers Timeline for manufacturing, delivery and order placement for ski industry in northern hemisphere prior to 2007 timeNov Dec Jan 2006 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2007 Feb Mar Apr Start manufacturing 2007 skis 2007 winter skis delivered to dealers Start manufacturing 2008 skis Orders placed for 2007 winter
    9. 9. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. 2006 was a warm winter and poor snow conditions badly affected the ski industry as people stayed home and didn’t buy new equipment Blizzard dealers were left holding a lot of 2006 inventory that they would hold & later discount during the 2007 winter
    10. 10. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. 2007 was also a warm winter as climate change began to seriously affect the Alps Gun shy from 2 bad winters, Blizzard dealers delayed commitment on 2008 orders until May after the ski season had finished
    11. 11. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. In 2006 business risks appear to be low 2006 winter skis delivered to dealers Changing climate conditions and its affect on ski dealers dramatically shifts the risk profile of ski manufacturing timeNov Dec Jan 2006 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2007 Feb Mar Apr Start manufacturing 2007 skis 2007 winter skis delivered to dealers Start manufacturing 2008 skis Orders placed for 2007 winter
    12. 12. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Previously lead time for delivery is 12 months 2006 winter skis delivered to dealers Traditionally manufacturers have had a full year to make the skis for the following winter timeNov Dec Jan 2006 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2007 Feb Mar Apr Start manufacturing 2007 skis 2007 winter skis delivered to dealers Start manufacturing 2008 skis Orders placed for 2007 winter Lead Time to manufacture 2007 deliveries
    13. 13. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. By 2007 the risk profile has changed dramatically 2006 winter skis delivered to dealers Dealers still holding 2006 & 2007 inventory decide to wait until the end of the 2007 season to place reduced orders for 2008 timeNov Dec Jan 2006 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2007 Feb Mar Apr Start manufacturing 2007 skis 2007 winter skis delivered to dealers Start manufacturing 2008 skis Orders placed for 2007 winter Orders placed for 2008 winter Volume is low due to over-stocking of older models The period of speculative manufacturing grows from 2 months to 6 months Time period of building to forecast rather than against customer orders Blizzard fail to anticipate falling demand and over-produce 2008 skis. Bankruptcy is a serious possibility!
    14. 14. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Tecnica Group & Blizzard managers turn to their business school education and seek to cut costs by consolidation & centralization Centralizing all order processing through Tecnica HQ adds 1 month to order times, increasing speculative build-to-forecast. As a result costs go up!
    15. 15. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Cutting costs will not make Blizzard “fit for purpose” !!! What is required to be “fit for purpose” in a period of climate change, is to defer manufacturing until firm orders are placed! Blizzard need to cut the lead time to build skis!
    16. 16. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. By 2010 the market has a new equilibrium 2010 winter skis delivered to dealers Traditionally manufacturers have had a full year to make the skis for the following winter timeNov Dec Jan 2010 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2011 Feb Mar Apr Start manufacturing 2011 skis 2011 winter skis delivered to dealers Start manufacturing 2012 skis Orders placed for 2011 winter Orders placed for 2012 winter Volume is low due to over-stocking of older models Lead Time to manufacture 2011 deliveries Lead time to manufacture skis to order is now 6 months. No speculative build-to-forecast To have a viable business Blizzard need a capability to make skis twice as fast as before!
    17. 17. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. In 2010 a Lean initiative was started in the factory. This was followed later with a Kanban initiative in IT and Quality Assurance Blizzard becomes the first Lean ski manufacturer in the world! CIO, Eric-Jan Kaak wins Austrian CIO of the Year 2013 and is promoted within Tecnica Group
    18. 18. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Lesson 1
    19. 19. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Blizzard initially made a bad decision because they didn’t understand the dynamics of their external environment Once they realized that only manufacturing skis faster & deferred commitment would make them “fit for purpose” did they focus improvement efforts where they could be most effective Ski craftsmen are now “idle” for 6 months per year. They use this time to improve the factory processes
    20. 20. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Understanding “fitness for purpose”
    21. 21. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. What makes a pizza delivery service “fit for purpose” ? • Fitness criteria are metrics that measure things customers value when selecting a service again & again • Delivery time • Quality • Predictability • Safety (or conformance to regulatory requirements)
    22. 22. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Meet Neeta - a project manager • Neeta’s team are working late (again) • Neeta needs to feed them with pizza • What attributes do her team care about in a pizza delivery service? • Delivery time = approximately 1 hour • Non-functional quality = tasty & hot • Functional quality (order accuracy) = doesn’t matter if small mistakes are made, geeks will eat any flavor of pizza • Predictability = +/- 30 minutes is acceptable • Safety = so long as health & safety in food preparation is good, it’s fine
    23. 23. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Neeta is also a working mom! • Neeta gets home late. Her kids are really hungry and even though she shouldn’t she decides to order pizza for them • What makes a pizza delivery service acceptable to her kids age 4, 6, 9 & 11 years? • Delivery time = 20 minutes • Non-functional quality = doesn’t matter too much, it’s pizza!!! • Functional quality (order accuracy) = it must be cheese pizza! No other flavor is acceptable! (even if you take the pepperoni off) • Predictability = +/- 5 minutes maximum!!! • Safety = only mommy worries about that stuff!
    24. 24. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Lesson 2
    25. 25. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. To be “fit for purpose” there is a product component & a service delivery component We need to offer a selection of different recipes which are tasty & popular. However, we must also deliver with speed & predictability
    26. 26. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Modern creative & knowledge worker businesses often obsess with product definition & strategy Operational excellence and service delivery excellence are often overlooked or treated as inferior management skills
    27. 27. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Lesson 3
    28. 28. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Neeta has 2 identities – Mother and Project Manager Each of Neeta’s identities represents a different market segment for the pizza delivery service
    29. 29. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. We need a different set of thresholds for our fitness criteria for each market segment Our business needs the ability to “sense” changing customer tastes. As time goes by the criteria & thresholds for a given market segment may change
    30. 30. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Our pizza delivery service can be “fitter for purpose” by offering different classes of service for each market segmentBut, do we have the capability to deliver on customer expectations?
    31. 31. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Understanding & improving service delivery capability with Kanban
    32. 32. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Test Ready F F FF F F F Commitment Frequency E I G D Replenishment Discarded I Pull Ideas Dev Ready 5 Ongoing Development Testing Done 3 35 UAT Release Ready ∞ ∞ The frequency of system replenishment should reflect arrival rate of new information and the transaction & coordination costs of holding a meeting Frequent replenishment & commitment is more agile. On-demand commitment is most agile!
    33. 33. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Test Ready F F FF F F F Defining Kanban System Lead Time E I G D Pull System Lead Time Discarded I Ideas Dev Ready 5 Ongoing Development Testing Done 3 35 UAT Release Ready ∞ ∞ The clock starts ticking when we accept the customers order, not when it is placed! Until then customer orders are merely available options Kanban system lead time ends when the item reaches the first ∞ queue
    34. 34. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Test Ready F F FF F F F Delivery Frequency E I G D Delivery Discarded I Pull The frequency of delivery should reflect the transaction & coordination costs of deployment plus costs & tolerance of customer to take delivery Ideas Dev Ready 5 Ongoing Development Testing Done 3 35 UAT Release Ready ∞ ∞ Frequent delivery is more agile. On-demand delivery is most agile!
    35. 35. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Service Delivery Agility Service Agility Commitment frequency Lead Time Delivery Frequency LeadTime Short Long Delivery Service Agility Commitment Frequent Seldom Frequent Seldom More Agile Less Agile Kanban system dynamics
    36. 36. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Understanding Cost of Delay Risk
    37. 37. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Data from Corbis, Seattle, April 2007 Lead times for IT system software change requests deployed during April 2007 Lead Time Distribution 0 0.5 1 1.5 2 2.5 3 3.5 1 8 15 22 29 36 43 50 57 64 71 78 85 92 99 106 113 120 127 134 141 148 Days CRs&Bugs This is multi-modal data! The work is of two types: Change Requests (new features); and Production Defects This is multi-modal data! The work is of two types: Change Requests (new features); and Production Defects Lead Time Histogram
    38. 38. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. 85% at 10 days Mean 5 days 98% at 25 days ChangeRequests ProductionDefects 85% at 60 days Mean 50 days 98% at 150 days Mode Median 45 days Filter by Type or Class to get Single Modal Data
    39. 39. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Understanding Cost of DelayRoomnights soldperday Actual rooms sold Cost of delay Estimated additional rooms sold When we need it When it arrived Cost of delay is difference in integral between the two curves timeJan Feb Mar Apr First sketch the market payoff function for the total lifetime of the opportunity. In this example, a Easter promotion for a hotel chain.
    40. 40. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Cost of Delay for a limited shelf-life opportunity follows an s-curve shape Cost of delay function for a Easter marketing campaign delayed by 1 month from mid-January based on the difference of 2 integrals on previous slide time impact Total cost of delay
    41. 41. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. When should we start something? impact When we need it 85th percentile Ideal Start Here Commitment point timeJan 10 Nov 11 If we start too early, we forgo the option and opportunity to do something else that may provide value. If we start too late we risk incurring the cost of delay If we pull the work into our kanban system on Nov 11 we have a 6 out of 7 chance of on-time delivery
    42. 42. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. We can study sensitivity to different start dates impact When we need it 50th percentile Later Start Here Commitment point timeJan 10 Nov 25 If we start as late as November 25 we only have a 50% chance of on- time delivery However, the cost of delay incurred if we deliver within 60 days is relatively small. We have an 85% chance of achieving delivery with acceptable cost of delay 85th percentile
    43. 43. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. What is the latest we could start? impact When we need it 0th percentile Very late start Commitment point timeJan 10 Dec 19 If we start as late as December 19 we have 0% chance of on-time delivery We have about a 10% chance of a total loss delivering the promotion beyond the expiry date of the opportunity 85th percentile total loss
    44. 44. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. To be certain of delivery without incurring any cost of delay is expensive impact When we need it 98th percentile Early Start Commitment point timeJan 10 Aug 11 If we are conservative and do not wish to carry any risk of late delivery or any risk of incurring an opportunity cost of delay, then we must start as early as August 13th. We must commit to our Spring Break 2015 promotion during Summer 2014!!!
    45. 45. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Lesson 4
    46. 46. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Lead time is perhaps the most important metric we gain from kanban systems Lead time coupled with cost of delay sensitivity analysis is a key enabler of deferred commitment and consensus on when to make commitments
    47. 47. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. What if we planned to do a series of marketing promotions for seasonal opportunities? Such as, Halloween, Lucia, New Year’s, Valentine’s, Easter, 1st of May & Midsummer?
    48. 48. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. How much WIP do we need? impact time Halloween Lucia New Year’s Easter 1st of May Midsummer Valentine’s WIP=4 To avoid risk of late delivery altogether, we need a WIP of at least 4. If current WIP >= 4 then workers will experience significant periods of slack and utilization will be low. Commitments must be made 150 days in advance of deliver and up to 240 days prior to the event There is only a 10% chance the system will have 4 items in- progress & around 50% chance of 3 items in-progress. So there will be considerable slack time
    49. 49. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Possible Kanban Board Design Done F E Engin- eering Ready Deploy- ment Ready G 1 ∞ P1 Ongoing Development Testing Done Verification Acceptance 2 2 Marketing Promotions 4 4 Improvements There is only about a 10% chance that 4 marketing promotions will be in-progress at the same time. So we hedge the risk of idle time by doing improvement tickets with a lower cost of delay and a lower class of service. Improvement tickets are marked as blocked when team members are servicing marketing promotions L M N D
    50. 50. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Halloween Lucia New Year’s Easter 1st of May Midsummer Valentine’s What if we were willing to accept more risk? impact time With a 50% chance of on-time delivery it appears we only need 3 WIP. If we wish to avoid accumulating additional risk of late delivery then we actually need a WIP of 4 as a 10% chance exists that 3 things will be in-progress when we need to start a 4th The chance of slack time remains the same and the board design would be unchanged. WIP=3??? Commitments need only be made 45 days in advance. A 105 day gain from the risk averse plan WIP=4
    51. 51. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. What happens if we have a much more agile organization?If observed lead time capability was significantly shorter and predictability greater, what benefits do we gain?
    52. 52. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. ChangeRequests 85% at 44 days Mean 33 days 98% at 68 days Median 26 days Improved Service Delivery Capability Shorter tail, much more predictable
    53. 53. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Halloween Lucia New Year’s Easter 1st of May Midsummer Valentine’s Now, how much WIP do we need? impact time To completely avoid risk of late delivery we need a WIP of 3. If WIP >= 3 when data was collected we have capacity. There will also be slack for lower class of service work Commitments are needed 70 days in advance. If we were prepared to reduce demand by just 1 project, WIP = 2 is sufficient WIP=3
    54. 54. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Halloween Lucia New Year’s Easter 1st of May Midsummer Valentine’s What if we were willing to accept more risk? impact time With a 50% chance of on-time delivery we only need WIP = 2 as there is almost no likelihood of a 3rd thing needing to be started before an earlier one is finished. Potentially allowing us to reduce staff by 33%. Commitments need only be made 26 days in advance. WIP=2??? As a result the lead time distribution will also be left- shifted further improving agility. There will still be some slack for lower class of service work.
    55. 55. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Lesson 5
    56. 56. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. We can trade sensitivity to cost of delay for the ability to decide later We must understand lead time distribution to understand how much WIP we need. This determines our staffing levels and carrying costs A mix of work with lower cost of delay and class of service is needed to enable us to start work at the ideal time with acceptable risk
    57. 57. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Aligning goals with capability
    58. 58. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Go on, you can lift it!
    59. 59. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Kanban system dynamics Shelf-life (of business opportunities) Is your service delivery fit for purpose? Short (days, weeks, months) Medium (months, quarters, 1-2 years) Long (years, decades) LeadTime Short Long Delivery Service Delivery Agility Replenishment Frequent Seldom Frequent Seldom Predictability High Low Is your service delivery predictability & agility fit enough for your business strategy? If you plan to pursue short shelf-life opportunities, you must measure predictability, lead time, replenishment & delivery frequency as fitness criteria. Does the capability exist to pursue the chosen strategy effectively?
    60. 60. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Lesson 6
    61. 61. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Improve your capabilities before pursuing market segments or strategies that require levels of service delivery beyond your reach With coaching & incremental development a child can grow to dead lift a large bar bell. Impatience & over-reaching is likely to end in tears! With patience, education and a focus on evolutionary change, your organization can grow its service delivery capability
    62. 62. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Conclusions
    63. 63. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. 1. Understand your external environment before deciding what to change 2. “Fitness for Purpose” has both a product component & a service delivery component 3. Each market segment will have its own fitness criteria and threshold values
    64. 64. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. 4. Lead time coupled with cost of delay sensitivity analysis is crucial for determining start dates 5. For acceptable economic outcomes we must have a mix of work with different risks and expect some late delivery & incurred cost of delay 6. Improve your capabilities before pursuing market segments or strategies that require service delivery you currently cannot achieve
    65. 65. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. Thank you!
    66. 66. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. About David Anderson is a thought leader in managing effective 21st Century businesses that employ creative people who “think for a living” . He leads a training, consulting, publishing and event planning business dedicated to developing, promoting and implementing new management thinking & methods… He has 30 years experience in the high technology industry starting with computer games in the early 1980’s. He has led software teams delivering superior productivity and quality using innovative agile methods at large companies such as Sprint and Motorola. David is the pioneer of the Kanban Method an agile and evolutionary approach to change. His latest book, published in June 2012, is, Lessons in Agile Management – On the Road to Kanban. David is a founder of the Lean Kanban Inc., a business dedicated to assuring quality of training in the Lean Kanban Method for managers of those who must “think for a living.”
    67. 67. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc. I’d like to thank Eric-Jan Kaak and the staff at Blizzard for providing access to produce the story of their Lean transformation. Software maintenance lead time data courtesy of Corbis. Acknowledgements
    68. 68. dja@leankanban.com @lkuceo Copyright Lean Kanban Inc.

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