ima

The Association of
Accountants and
Financial Professionals
in Business

Strategic Alignment for Driving Superior Business Results:

Using Hoshin Kanri to Link Lean Initiatives with Business Strategies

Statement on Management Accounting

About IMA® (Institute of Management Accountants)
IMA, named 2017 Professional Body of the Year by The Accountant/International
Accounting Bulletin, is one of the largest and most respected associations
focused exclusively on advancing the management accounting profession.
Globally, IMA supports the profession through research, the CMA® (Certified
Management Accountant) program, continuing education, networking, and
advocacy of the highest ethical business practices. IMA has a global network of
more than 100,000 members in 140 countries and 300 professional and student
chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services
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East/India. For more information about IMA, please visit www.imanet.org.

Statements on Management Accounting

SMAs present IMA’s position on best practices in management accounting.
These authoritative monographs cover the broad range of issues encountered
in practice.

© May 2018
Institute of Management Accountants
10 Paragon Drive, Suite 1
Montvale, NJ, 07645
www.imanet.org/thought_leadership
About the Authors
Jd Marhevko, senior vice president of QLMS and EHS for Accuride,
has been involved in operations and Lean Six Sigma for almost
30 years. Four Accuride sites have been recipients of the AME
Manufacturing Excellence Award. Jd is coauthor of the book Lean
Management 50-50-20. She is an American Society of Quality (ASQ)
Fellow and holds the ASQ Certified Manager of Quality/Organizational
Excellence (CMQ/OE), ASQ Certified Quality Engineer (CQE), and
ASQ Certified Six Sigma Black Belt (CSSBB), and she is a Master Black
Belt (MBB). In 2018, Jd was recognized by Crain’s as one of Michigan’s
Notable Women in Manufacturing. In 2016, Jd was awarded the
Shainin Medal and was honored as one of the top 100 Women in
Manufacturing. Jd is a past chair of the ASQ Quality Management
Division (21,000 members). She holds a bachelor of science in
engineering from Oakland University in Michigan and a master of
science in administration from Central Michigan University. She can be
reached at [email protected].

Gary Cokins is an internationally recognized expert, speaker, and book

author in business analytics and enterprise performance management
systems. He serves as the part-time IMA executive-in-residence.
He is the founder of the advisory firm Analytics-Based Performance
Management LLC (www.garycokins.com). He began his career in
industry with a Fortune 100 company in CFO and operations roles.
He then worked 30 years in consulting with Deloitte, KPMG, EDS,
and SAS. He holds a bachelor of science from Cornell University
in industrial engineering/operations research and an MBA from
Northwestern University’s Kellogg School of Management. You can
reach Gary at [email protected].

Pem Smith is a retired finance and operations director with

experience in service companies, manufacturing organizations, and IT
program management. A certified Six Sigma Green Belt through the
American Society for Quality (ASQ), he holds a bachelor of science in
industrial engineering from the University of Michigan and an MBA
from San Diego State University. He is one of the IMA representatives
on the ASQ’s Quality Management Division Technical Committee on
Governance and is also currently the Dean of the IMA Leadership
Academy. You can reach Pem at [email protected].
PERFORMANCE MEASUREMENT, Strategic Alignment for Driving Superior Business Results:
INCENTIVES & ALIGNMENT Using Hoshin Kanri to Link Lean Initiatives with Business Strategies

Executive Summary
Many organizations have deployed a variety of process and profitability improvement programs
over the years to increase efficiencies and eliminate waste. The discipline of lean enterprises
has offered great opportunities for organizations to reduce waste and improve cycle time for
processes, leading to improvements in shareholder value. Improvement areas are suggested
by the DuPont equation, which relates shareholder value to various measures of return on
investment (ROI), such as return on assets (ROA), return on net operating assets (RONOA),
and so on. At a high level, lean promotes improvement in profitability by seeking to eliminate
activities that don’t directly contribute to the production of a process or service that a customer
values and will pay for. Examples include scrap and rework, unnecessary process steps, or
excessive movement of parts and materials. Lean also promotes reduced investment by
eliminating production beyond what is required and increasing throughput by reducing work-
in-process inventories. Highly effective lean organizations—in both manufacturing and support
areas—have demonstrated improvements in unit cost, throughput, and productivity.
As an organization seeks to achieve the benefits of lean, it’s important to keep the
company’s resources focused on the initiatives and projects that demonstrably support the
strategic objectives defined by senior management. This Statement on Management Accounting
(SMA) describes and demonstrates a tool for achieving that focus, Hoshin Kanri, which starts with
the strategic objectives for the organization and provides a disciplined process to:
• Flow those objectives to each functional area,
• Identify improvement initiatives and projects that support achievement of the objectives,
• Develop operational performance indicators (OPI) supporting the organization’s key
performance indicators (KPI), and
• Assign resources to each initiative.

Recognizing that there is a continuum of experience in lean implementations, the

SMA includes appendices describing the benefits of lean in more detail, suggested ways to
implement lean in an organization, and selection of KPIs.

Introduction
Since 2014, IMA® (Institute of Management Accountants) has been partnering with the American
Society for Quality’s Quality Management Division (ASQ/QMD) Technical Committee on Finance
and Governance to recognize the common objectives of financial and quality management
systems in organizations. These include:

• Maintenance of effective systems of internal controls, both operationally and financially;

and
• Continuously improving the efficiency and effectiveness of processes to achieve superior
business results.

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PERFORMANCE MEASUREMENT, Strategic Alignment for Driving Superior Business Results:
INCENTIVES & ALIGNMENT Using Hoshin Kanri to Link Lean Initiatives with Business Strategies

Numerous studies of high-performing organizations have demonstrated that a vibrant

and active quality/lean management system (QLMS) can provide financial benefits such as:

• Recognition of opportunities to reduce product and process cost, improving

competitiveness and profitability;
• Implementation of effective methods of flow that enable product and process
improvements to profitably grow the business; and
• Sustainment and growth of practices and systems to meet product and process
requirements and reduce risk.

Organizations of all sizes and complexity have processes for developing business
strategies. Highly successful organizations are distinguished from the others by their ability
to engage and energize all levels of the organization in activities that execute that strategy
effectively. In QLMS terms, activities that don’t support strategies are “waste,” which should be
eliminated. Thus, at the functional level, the QLMS team itself should also link its own initiatives
to those plans. On financial statements, activities that don’t support strategic objectives can be
reflected in increased costs or additional investment, resulting in reduced return on investment
(ROI) and, thus, lower shareholder value.
By training and work experience, management accountants are ideally positioned to
be strategic partners with quality and lean managers in achieving the benefits of this approach,
providing insights into the financial ramifications of operational activities.
This Statement on Management Accounting (SMA) reflects the inherent connection
between the tools used to promote alignment by finance and quality/lean organizations. By
implementing the best of both financial and quality tools, organizations can achieve superior
business results compared to their peers. This SMA also provides the essential success factors
and potential pitfalls in implementing linkage between strategy and execution across the entire
organization.

Strategic Planning
At its core, driving superior business results starts with strategic planning. Robert S. Kaplan
and David P. Norton of Harvard University are among the foremost researchers in strategic
planning and the execution of strategic plans.1 Their research began in 1992 with the balanced
scorecard (BSC), a strategy-execution method they developed in response to a period of
excessive management emphasis on after-the-fact, short-term financial results. The BSC resolves
this myopia and improves organizational performance by shifting attention from managing
solely financial measures to managing both financial and nonfinancial operational measures
related to customers, internal processes, and employee innovation, learning, and growth. These

1
Robert S. Kaplan and David P. Norton, The Execution Premium: Linking Strategy to Operations for Competitive
Advantage, Harvard Business School Publishing Corporation, Boston, Mass., 2008.

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INCENTIVES & ALIGNMENT Using Hoshin Kanri to Link Lean Initiatives with Business Strategies

influencing measures are reported during the period when timely reactions can occur. This in
turn promotes achieving the executives’ formulated strategy and better financial results.
Following initial experience with implementation of the BSC, it became clear that a more
systematic approach toward development and execution of strategy was needed. The result
of this realization was the creation of a framework for strategy development and management
across financial and nonfinancial dimensions using a tool called strategy maps. The strategy
mapping process recognized that the success of a BSC depends on successful identification of
the organization’s vital few key performance indicators (KPIs). In practice, it’s difficult to separate
the vital few measures from the trivial many without first understanding where the executive team
wants the organization to go. The executive team’s vision and mission explains this, and the team
must set the direction for the organization to follow. That’s the executive team’s primary job:
setting and communicating direction. The strategy map is a powerful tool for this communication.
Figure 1 illustrates a generic strategy map with the typical four stacked perspectives
(these perspectives can be tailored for a specific organization). Each rectangle in the figure
represents a strategic objective with appropriate measures and targets and its associated
projects or processes to improve.

Figure 1: Generic Strategy Map Architecture

Maximize Shareholder Value

Financial

Financial ▲ ▲

▲ ▲ ▲ ▲
Customer

Customer ▲ ▲ ▲ ▲
▲

▲ ▲
Internal Process

Internal
Processes ▲
▲
Learning

Learning &
Innovation

Note that there are dependency linkages in a strategy map with an upward direction
of cumulating effects of contributions. To summarize, a strategy map links from the bottom
perspective upward:

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PERFORMANCE MEASUREMENT, Strategic Alignment for Driving Superior Business Results:
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• Accomplishing the employee innovation, learning, and growth objectives contributes to

the internal process improvement objectives.
• Accomplishing the internal process improvement objectives contributes to the customer
satisfaction objectives.
• Accomplishing the customer loyalty and satisfaction objectives results in achieving the
financial objectives, typically a combination of revenue growth and cost management
objectives.

With a strategy map, the energy, priorities, and actions of people are mobilized, aligned,
and focused to achieve the strategic objectives. The upward direction arrows in the strategy
map represent the KPIs. One can say that, at the top of the map, maximizing shareholder wealth
(or, for public sector organizations, maximizing community and citizen value) is not really a goal
but rather a result from accomplishing all the linked strategic objectives with cause-and-effect
relationships.

A Strategy Map as a GPS Navigator for the Organization

Think of an organization as an automobile. The motor and driveshaft are the employees with
their various methods, such as customer value management and service delivery. The workforce
propels the organization toward its target. Collectively, the various enterprise performance
management (EPM) and corporate performance management (CPM) methods, including lean and
agile management, serve as intermeshed gears. The projects and processes serve as the fuel.
Refining how the strategy map and its associated BSC are used serves as the GPS route
navigator for organizations—where the destination input into the GPS is the executive team’s
strategy. As already noted, the executive team’s primary job is to set strategic direction, and the
“top” of its strategy map is its destination—increase financial value to shareholders (or, in the
public sector, value to citizens). Unlike a GPS’s knowledge of roads and algorithms to determine
the best route, however, managers and employee teams must themselves “map” which projects,
initiatives, and process improvements are best to get to the destination of realizing the strategy.
To carry the analogy one step further, when you make a wrong turn while driving a car
with GPS, the GPS’s voice chimes in to tell you that you are off-track—and then provides you
with corrective-action driving instructions. Unlike the GPS, the calendar-based and long-cycle-
time reporting that most organizations have leads to a delayed reaction. This can be mitigated
by monitoring the variances between actual and target KPIs as timely signals of opportunities for
corrective actions.
Finally, a strategy is never static but is constantly adjusted. This means the destination
input to the GPS navigator is constantly changing. The result is an increasing importance on
using predictive analytics to determine the best destination (strategy) for meeting the needs
of stakeholders combined with a rigorous process to realign the links with each initiative and
project.

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Aligning Strategy
Just having a strategy isn’t enough—it must be communicated clearly throughout the
organization, departmental and individual objectives must all be aligned with the strategy, and
action plans or tactics must be developed and executed to achieve the strategic objectives.
In many organizations, managers and employees don’t know or are unclear about the
executive team’s strategy. Several years ago, a USA Today “Snapshot” stated that only 3% of
North American businesses shared their strategies with their personnel. This is puzzling. It’s
critical that business leadership share as much as possible with its associates so that, at the very
least, the associates are positioned to help the organization achieve its goals. Personnel with
clear goals that connect their actions to that of the overall business generally have higher levels
of engagement—and higher engagement leads to happier people. And, per Shawn Achor, there
is a “Happiness Advantage” in business.2 Businesses with happy people have 37% more sales,
are 31% more productive, and are 10 times more engaged.3
So, why is the C-suite worried about sharing its key strategies with its personnel? There
are generally two reasons given: 1) Personnel may not be able to really understand what the
strategies are and why they’re needed, and 2) the competition may find out. Regarding the first
concern, it’s up to the management team to create that translation of the whys and wherefores. In
How the Mighty Fall, Jim Collins outlines how businesses decline and identifies many markers for
businesses to recognize whether they are on this downward spiral.4 By not sharing the “why’s of
the what’s,” the leadership team members run this risk as well as the possibility of perpetuating
confusion, even amongst themselves. As for the competition finding out, it’s highly likely that the
competition already knows the organization’s next logical plays. Of course, the amount of detail
that’s shared may need to be filtered; nevertheless, the main objectives need to be shared.
Toyota, Autoliv, and O.C. Tanner often are considered some of the most successful lean
businesses today. All of them welcome people to come and see their methods and processes.
Their strategies are widely broadcast to their leadership and disseminated across the workforce.5
It’s key that the functional managers and their teams proactively align themselves to the
organization’s strategies. This demonstrates and reinforces the relevance of their systems to the
business at hand. One powerful methodology to accomplish this is Hoshin Kanri. This step-by-
step planning process often uses an iterative matrix model to connect the organization strategies
to the projects, actions, and initiatives of supporting functions. Those initiatives are broken out
into tasks, and key metrics are defined. As the matrix is developed, an iterative and interactive
process of learning and alignment occurs across the organization’s leadership team and its team
members. In Hoshin Kanri, this is referred to as a “catch ball” process, with successive back-and-
forth cycles that help clarify and align the organizational functions’ plans to execute the strategies.

2
Shawn Achor, The Happiness Advantage, Crown Business, 2010.
3
Shawn Achor, “The Happiness Dividend,” Harvard Business Review, June 2011, https://hbr.org/2011/06/the-
happiness-dividend; Shawn Achor, “Positive Intelligence,” Harvard Business Review, January-February 2012, https://hbr.
org/2012/01/positive-intelligence.
4
Jim Collins, How the Mighty Fall, Harper Collins Publishers, Inc., 2009.
5
5
Jd Marhevko, Arvind Srivastava, and Mary Blair, Lean Management 50-50-20, Accuride Corporation, 2016.
PERFORMANCE MEASUREMENT, Strategic Alignment for Driving Superior Business Results:
INCENTIVES & ALIGNMENT Using Hoshin Kanri to Link Lean Initiatives with Business Strategies

Hoshin Kanri is a robust process that has evolved into many variants. This SMA will show
a simplified concept as to how the strategies, as developed by an organization’s executive team,
can be linked to functional initiatives. Table 1 shows a simplified example of a Hoshin Kanri
matrix completed for the alignment of the QLMS function of the organization.

Table 1: Hoshin Kanri Matrix

LEVEL II MATRIX – YEAR xxxx: Quality/Lean Management Systems (QLMs)

B1. Conduct Customer Satisfaction Survey. Evaluate Results and Implement Connective Actions
based on Feedback
A2. Execute SPC Review of all Key Characteristics. Verify for Effectiveness
A1. Define Black Belt projects, Implement and Sustain

2nd Level
A. Scrap/Defect Abatement; Process Control

Tactics

Lead: Days Inventory On Hand (DIOH)

E. Compliance Systems Management

(To Achieve the Initiatives)

Lag: Customer Satisfaction Survey

C. Lean/Continuous Improvement
D. QLMS Systems Optimization:

Top Level

Lead: Material Usage Variance

Lead: OTD: By Customer Date
Initiatives KPIs

Lead: PPM/Scrap Internal

B. Coustomer Satisfaction

(To Achieve Priorities) To Improve

Transactional Processes

YEAR xxxx

Lag: Margin
Integration

Strategic Priorities

Person 1
Person 2
Person 3
Be the Best There Is...

1. Stakeholder. Grow Profitable Sales by X% by Y Date

2. Stakeholder. Grow Margin by X% by Y Date
3. Customer. World Class Quality, Delivery
4. Employee. Grow Satisfaction by X%, Minimal Unplanned Turnover to Y%
5. Supply Chain. World Class Quality, Delivery
6. Community. Grow Social Responsibility. Meet/Exceed Compliance Requirements

Resources: Responsible/Accountable Consulting/Support

Three (3) QLMS Strategies: 1. Improve upon what we do 2. Deliver new products/processes well 3. Grow skills to enable 1 & 2

The cube is organized into five sections:

• The 6 o’clock (bottom) position lists the organization’s strategies. The strategies are
typically the responsibility of the executive team.
• The 9 o’clock (left side) position lists the relevant QLMS initiatives reflecting the strategy
map. As part of the strategy mapping process, each functional area develops proposed
initiatives to achieve the strategies and obtains executive management approval.
• The 12 o’clock (top) position lists key tactics that will be executed to accomplish the
initiatives. Tactics are developed at the appropriate level of the organization and are
approved by functional management.
• The 3 o’clock position (right side) lists KPIs and ties to the BSC.
• To the right of the KPIs is a section for functional managers to assign resources to each of
the tactics. This important step prevents overcommitting scarce resources, which can lead
to project delay or failure.

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Two additional steps are required to complete the linkage and be prepared to reap the benefits
of the process.
1. Target values need to be established for each indicator to provide a yardstick for
assessing performance. The executive team typically establishes the targets.
2. A control process needs to be in place to ensure a timely update and analysis of the
KPIs and initiation of any necessary corrective action for unfavorable variances by the
responsible function.

Note that there are bullets at each intersection of the matrix so that the linkages
between strategy and initiatives, initiatives and tactics, tactics and KPIs, and KPIs and strategy
are delineated. It’s important to enforce the organizational discipline to address each step in the
process. Sadly, many organizations neglect the first two elements, where the executive team’s
formulated strategy resides. They skip to selecting KPIs without identifying the strategies and
QLMS initiatives that reflect those strategies.

Roles and Responsibilities

In most organizations, an effective approach is for the executive team to develop the
strategic objectives for the organization based on its understanding of strengths, weaknesses,
opportunities, and threats. Once this is completed, the executive team can engage the
managers and employees in identifying initiatives and tactics to achieve the desired strategic
results. Table 2 depicts the roles and responsibilities for linkage of execution to strategy. The
arrow in the second column indicates the iterative “catch ball” nature of the process. Using
Hoshin Kanri ensures a clear understanding of the linkage between strategy, initiatives, and
tactics, and it fosters buy-in at all levels of the organization.

Table 2: Who Is Responsible for What?

Measurement 1st Quarter

Period

Identify
Projects,
Strategic Initiatives, Comments/
Objective or Processes KPI Measure KPI Target KPI Actual Explanation

Executive Team ▲ ▲
▲ ▲
Managers and
Employees their score X
period results
▲

A similar iterative process is used to select the KPIs to be used to monitor

implementation of the tactics and initiatives and progress toward achieving the strategic

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objectives. The managers and employees must accept accountability and responsibility for the
chosen metrics, and all must agree that the appropriate indicators are in place. Care should be
taken at this step to define specifically how the metrics will be collected, stored, and reported.
As the caption to Table 2 indicates, the collection of metrics and preparation of a scorecard is
really a social tool—it should be constructed with a view toward fostering collaboration and
teamwork to achieve the organization’s strategic objectives. The focus should be on picking
measures that promote desired behaviors (i.e., a social tool) rather than on the elegance of
the measures themselves (i.e., a technical tool). The executive team is responsible for setting
target values for each KPI to establish the direction of desired change and defining the point
at which the strategic objective has been met. Managers are responsible for implementing the
measurement and analysis processes for each KPI and communicating the results to the entire
team in a timely manner.
In conclusion, a strategy map and its derived BSC are navigational tools to guide the
organization to execute the strategy, not necessarily to formulate the strategy. Most executive
teams are good at defining strategy, but there’s some evidence of organizations failing to
implement their strategy successfully. Today’s boards of directors are impatient with CEOs who
aren’t implementing their strategy successfully, resulting in short tenures for the CEO and other
key managers.

A Hoshin Kanri Functional Example

The remainder of this SMA will address aspects of implementing lean concepts through projects
and initiatives that are aligned to the strategy map and measured by the BSC. Depending
on the degree to which your organization has evaluated the benefits of implementing lean
concepts in its operations, it should be clear that each of the areas of the strategy map (learning
and innovation, internal processes, customer, and financial) are adaptable to lean objectives
and affiliated projects. (For organizations that haven’t adopted lean concepts in their strategy,
Appendix 1 provides a more in-depth review of the benefits to be gained by adopting lean
concepts while Appendix 2 provides suggestions for starting an organization down a lean path.
Appendix 3 is an in-depth discussion of KPIs.)
While all functions need to be aligned, for simplicity, this section will specifically
reference the QLMS of the organization and its connection to sample business strategies. While
sustaining and/or building upon the compliance portions of the QLMS, the lean and quality
professional needs to continue to demonstrate the value they bring to the organization. A similar
alignment should be made with the other functions of the organization, including supply chain,
engineering, human resources, legal, finance, and others. These matrices are referred to as
Level II Kanris. Depending on the size of the organization, these Level IIs may be blended into
one large document, or they may be retained independently by the functional groups as the
tactics are executed. It is important, however, for the functional teams to see each other’s Kanris.
This avoids duplication of effort and promotes collaboration on common themes to further refine
the quantity of initiatives.
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Strategy Flow-Down
The first step is to acknowledge, accept, and document the organizational strategies as they
affect the specific functional entity. Table 3 is the detailed breakout of the sample organization’s
strategies:

Table 3: Flow-Down of Organizational Strategies

1. Stakeholder: Grow Profitable Sales by X% by Y Date

2. Stakeholder: Grow Margin by X% by Y Date

3. Customer: World Class Quality, Delivery

4. Employee: Grow Satisfaction by X%, Minimal Unplanned Turnover to Y%

5. Supply Chain. World Class Quality, Delivery

6. Community: Grow Social Responsibility, Meet/Exceed Compliance Requirements

In this example, the business has organized the strategies following both performance
excellence formats (the Baldrige Foundation) and the newly upgraded ISO 9001:2015 to
address various “interested party” groups, including supply chain, employees, customers, local
community, and stockholders (SECCS). The challenge for the quality and lean professional is
to align the QLMS processes and results to business strategies—regardless of whether those
strategies specifically mention lean systems.

Identification of Functional Initiatives

The next step is to identify broad initiatives that the functional area will pursue to achieve the
strategic objectives. The initiatives should recognize that strategy is never static because the
environment is volatile. Strategy by its nature involves responding to changes, and the initiatives
are the tools to implement these responses. This is what distinguishes a strategic initiative from
just getting better at what the organization has already been doing.
One approach to the development of initiatives is to consider the business enterprise
through the four segments of lean systems in a typical organization (see Figure 2):
1. Operations: The efficient (fast) movement of effective (correct) things.
2. Transactional: The efficient (fast) movement of the effective (correct) data or information.
3. Enterprise: The efficient (fast) movement of the effective (correct) things and information
across the business entity.
4. External Partners: Transactional data effectiveness and efficiency (fast and correct) with
customers, suppliers, outside providers, and compliance organizations.

By considering each of these systems, each function can more objectively focus on its
own processes to better enable the organization’s success.

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Figure 2: A Lean Framework for Execution

As each initiative is identified, functional management determines how each one matches
with the various strategies (see Table 4). Correlation dots help to show the alignment of the
initiatives to the strategies. The goal is to minimize the number of initiatives needed to achieve
the stated objectives. In the example, if “scrap/defect abatement” occurs, then strategies 1, 2,
5, and 6 could be impacted positively. Scrap abatement is key for lean systems because process
flow can’t occur when defects are occurring (whether those defects are encapsulated in parts or

LEVEL II MATRIX – YEAR xxxx: Quality/Lean Management Systems (QLM

transactional data). The correlation dots highlight the value proposition that the QLMS function
is bringing to the achievement of strategy.
B1. Conduct Customer Satisfaction Survey. Evaluate Results and Implement Connective Actions
based on Feedback
Table 4: Functional Initiatives
A2. Execute SPC Review of allLinked to Strategic
Key Characteristics. Verify forPriorities
Effectiveness
A1. Define Black Belt projects, Implement and Sustain

2nd Level
A. Scrap/Defect Abatement; Process Control

Tactics Lead: Days Inventory On Hand (DIOH)

E. Compliance Systems Management

(To Achieve the Initiatives)

Lag: Customer Satisfaction Survey

C. Lean/Continuous Improvement
D. QLMS Systems Optimization:

Top Level
Lead: Material Usage Variance
Lead: OTD: By Customer Date

Initiatives KPIs
Lead: PPM/Scrap Internal
B. Coustomer Satisfaction

(To Achieve Priorities) To Improve

Transactional Processes

YEAR xxxx
Lag: Margin
Integration

Strategic Priorities
Person 1
Person 2

Be the Best There Is...

1. Stakeholder. Grow Profitable Sales by X% by Y Date

2. Stakeholder. Grow Margin by X% by Y Date
3. Customer. World Class Quality, Delivery
4. Employee. Grow Satisfaction by X%, Minimal Unplanned Turnover to Y%
5. Supply Chain. World Class Quality, Delivery
6. Community. Grow Social Responsibility. Meet/Exceed Compliance Requirements

Resources: Responsible/Accountable Consulting/Support

Three (3) QLMS Strategies: 1. Improve upon what we do 2. Deliver new products/processes well 3. Grow skills to enable 1 & 2
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Identification of Tactics to Achieve the Objectives

After the QLMS team and the executive team agree upon the top-level initiatives, QLMS
management can begin to identify key tactics needed to achieve the initiatives. Correlation dots
are again used to show which tactics support which initiatives. Ideally, tactics are identified that
can support multiple initiatives, minimizing the total number of initiatives that need to be staffed
and funded. The tool also links the alignment of initiatives to the original strategies.
Table 5 shows the result of this process. The tactics for the year are aligned to the
initiatives. A1 demonstrates how a tactic can span several initiatives. This cross-cutting tactic
enables the optimization of functional team resources and reduces silos. A2 is also cross-cutting
and impacts four initiatives that, in turn, affect all the strategies.

LEVEL II MATRIX
Table 5:–Tactics
YEAR xxxx:
Aligned Quality/Lean
to Top-Level Initiatives Management Systems (QLM
B1. Conduct Customer Satisfaction Survey. Evaluate Results and Implement Connective Actions
based on Feedback
A2. Execute SPC Review of all Key Characteristics. Verify for Effectiveness
A1. Define Black Belt projects, Implement and Sustain

2nd Level
A. Scrap/Defect Abatement; Process Control

Tactics

Lead: Days Inventory On Hand (DIOH)

E. Compliance Systems Management

(To Achieve the Initiatives)

Lag: Customer Satisfaction Survey

C. Lean/Continuous Improvement
D. QLMS Systems Optimization:

Top Level

Lead: Material Usage Variance

Lead: OTD: By Customer Date
Initiatives KPIs

Lead: PPM/Scrap Internal

B. Coustomer Satisfaction

(To Achieve Priorities) To Improve

Transactional Processes

YEAR xxxx

Lag: Margin
Integration

Strategic Priorities

Person 1
Person 2
Be the Best There Is...

1. Stakeholder. Grow Profitable Sales by X% by Y Date

2. Stakeholder. Grow Margin by X% by Y Date
3. Customer. World Class Quality, Delivery
KPIs 4. Employee. Grow Satisfaction by X%, Minimal Unplanned Turnover to Y%
5. Supply
Benjamin Franklin said that if you watch Chain.
yourWorldpennies,
Class Quality,your
Deliverydollars will take care of themselves.
6. Community.
This is wise advice when applying Grow Social Responsibility.
it to managing KPIs andMeet/Exceed Compliancebetween
differentiating Requirements leading

Resources:
and lagging indicators.Responsible/Accountable
Essentially, if you onlyConsulting/Support
manage the lagging indicators, the system of
Three is
management (3)largely
QLMS Strategies:
reactive 1.rather
Improve upon
than what we do
proactive 2. DeliverFor
or predictive. newexample,
products/processes well
profit margin 3. Grow skills to enable 1 & 2
is a typical lagging indicator. It’s absolutely a required metric from Wall Street’s perspective (for
example, for investment analysts). Yet by managing its key inputs—such as scrap, rework, or
overtime—up front, the team has a stronger chance of yielding better-desired financial results.
Manage the leads—the drivers—and the lags will take care of themselves.
Over time, there seems to be some synchronicity with a 2-to-1 ratio of leading
indicators to lagging ones. By having the team put its efforts into managing those two leading
indicators (the pennies), the lagging values (the dollars) usually manage themselves.

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Table 6 demonstrates both leading and lagging indicators. Linkage between the KPIs and
the tactics can easily be seen. A powerful benefit to this visibility is that the impact of each tactic on
a KPI can be understood and possibly predicted, enabling the organization’s governance function
to more clearly identify with how the QLMS functions are providing tangible value to the team.

LEVEL II MATRIX – YEAR xxxx: Quality/Lean

Table 6: KPIsManagement Systems (QLMs)

B1. Conduct Customer Satisfaction Survey. Evaluate Results and Implement Connective Actions
based on Feedback
A2. Execute SPC Review of all Key Characteristics. Verify for Effectiveness
A1. Define Black Belt projects, Implement and Sustain

2nd Level
A. Scrap/Defect Abatement; Process Control

Tactics

Lead: Days Inventory On Hand (DIOH)

E. Compliance Systems Management

(To Achieve the Initiatives)

Lag: Customer Satisfaction Survey

C. Lean/Continuous Improvement
D. QLMS Systems Optimization:

Top Level

Lead: Material Usage Variance

Lead: OTD: By Customer Date
Initiatives KPIs

Lead: PPM/Scrap Internal

B. Coustomer Satisfaction

(To Achieve Priorities) To Improve

Transactional Processes

YEAR xxxx

Lag: Margin
Integration

Strategic Priorities

Person 1
Person 2
Person 3
Be the Best There Is...

1. Stakeholder. Grow Profitable Sales by X% by Y Date

2. Stakeholder. Grow Margin by X% by Y Date
3. Customer. World Class Quality, Delivery
4. Employee. Grow Satisfaction by X%, Minimal Unplanned Turnover to Y%
Table 7: A Completed Level II Hoshin Kanri
5. Supply Chain. World Class Quality, Delivery
LEVEL IIGrow
6. Community. MATRIX – YEAR
Social Responsibility. xxxx: Compliance
Meet/Exceed Quality/Lean Management
Requirements Systems (QLMs)

Resources: Responsible/Accountable Consulting/Support

B1. Conduct Customer Satisfaction Survey. Evaluate Results and Implement Connective Actions
based on Feedback

Three (3) QLMS Strategies: 1. Improve upon what we do 2. Deliver new products/processes well
A2. Execute SPC Review of all Key Characteristics. Verify for Effectiveness
3. Grow skills to enable 1 & 2
A1. Define Black Belt projects, Implement and Sustain

2nd Level
A. Scrap/Defect Abatement; Process Control

Tactics
Lead: Days Inventory On Hand (DIOH)
E. Compliance Systems Management

(To Achieve the Initiatives)

Lag: Customer Satisfaction Survey
C. Lean/Continuous Improvement
D. QLMS Systems Optimization:

Top Level
Lead: Material Usage Variance
Lead: OTD: By Customer Date

Initiatives KPIs
Lead: PPM/Scrap Internal
B. Coustomer Satisfaction

(To Achieve Priorities) To Improve

Transactional Processes

YEAR xxxx
Lag: Margin
Integration

Strategic Priorities
Person 1
Person 2
Person 3

Be the Best There Is...

1. Stakeholder. Grow Profitable Sales by X% by Y Date

2. Stakeholder. Grow Margin by X% by Y Date
3. Customer. World Class Quality, Delivery
4. Employee. Grow Satisfaction by X%, Minimal Unplanned Turnover to Y%
5. Supply Chain. World Class Quality, Delivery
6. Community. Grow Social Responsibility. Meet/Exceed Compliance Requirements

Resources: Responsible/Accountable Consulting/Support

Three (3) QLMS Strategies: 1. Improve upon what we do 2. Deliver new products/processes well 3. Grow skills to enable 1 & 2

Resource Assignment
When the full Hoshin Kanri is developed, the leadership team has constructed a clear linkage
from the strategy of the organization through the development of aligned initiatives and
effective tactics. The last step, shown in Table 7, is to align functional resources to each of the
tactics to ensure that the planning has a realistic chance of achievement. 12
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Aligned Execution
Once the initiatives, tactics, and KPIs are defined, the process of aligned execution begins
through the implementation of the developed tactics. The completion of the tactics enables the
initiatives to be achieved and furthers the attainment of the strategies and KPIs. The KPIs and
their cascaded operational performance indicators (OPIs) provide the mechanism for alignment.
The old adage is, “You get what you measure.” The KPIs and OPIs provide the “line of sight”
for managers and employee teams to view how what they do—their priorities and actions—
contribute to accomplishing the strategic objectives.

Conclusion
To effectively execute the business’s overall strategy, the development of a Hoshin Kanri
that links the business’s key strategies to that of the organization’s functions can be critical.
The Hoshin Kanri process methodically destroys silos and increases employee engagement,
enabling success of key strategies. By creating these linkages, the overall business deploys
fewer initiatives while developing precise tactics that are optimized to advance the company’s
strategies.
After the strategies and tactics are developed, the KPIs are then determined to monitor
the progress. Developing leading and lagging indicators, usually in a 2-to-1 ratio of lead to lag,
can enable an organization to be more proactive rather than reactive to end results. The Hoshin
Kanri also helps strip out redundant or correlating metrics, thereby enabling a very streamlined
metrics system. Utilize the basic tenets of process control to enable focus on variation reduction
and basic process improvement. With the Hoshin Kanri and KPIs in place, execute to the tactics.
.

Additional Resources
Chad Smith and Debra Smith, “The Importance of Flow and Why We Fail So Miserably at It,”
Quality Management Forum, Spring 2015, pp. 17-25. This describes the definition of flow in lean
manufacturing environments and its importance to organizational success.

Grace Duffy, “Evolutionary and Revolutionary Decision Making Models,” Quality Management
Forum, Spring 2015, pp. 9-12. This provides further insight on how to develop the general
content of the strategic plan.

Daniel Zrymiak, “Understanding Governance Within Organizational Excellence and Management

Systems,” Quality Management Forum, Spring 2015, pp. 5-8. This outlines some potential
approaches to linking functional objectives to the organization’s strategy.

Gary Cokins, “Fixing a Kite with a Broken String–The Balanced Scorecard, Quality Management
Forum, Spring 2015, pp. 13-16. There are several ways to develop KPIs. This provides excellent
guidance.

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Appendix 1: Becoming Lean across the Enterprise

The Benefits of Incorporating Lean Initiatives with Strategies
The business case for lean is compelling. Eliminating waste improves workforce productivity,
reduces the cycle time to produce an end product, and lowers unit cost. This has a direct impact
on the bottom line of the organization and its value to shareholders. The DuPont equation
suggests that shareholder value correlates well to ROI. Therefore, an effective lean strategy can
have these benefits to shareholder value:
• Shorter cycle times require less investment in in-process inventory;
• Reduced unit cost means improved profit margins if the price remains steady; and
• Improved productivity can result in more volume capacity with a given set of resources.

Strategically, the benefits of lean can allow an organization to be nimbler in the

marketplace through:
• Faster response to changes in market demand signals with shorter cycle times;
• More competitive pricing with reduced unit costs; and
• Internal capacity to meet new opportunities through increased productivity of existing
resources.

These benefits have been demonstrated in real-world implementations, including those

documented in the book Lean Management 50-50-20.6 Accuride Corporation showed that
with effective lean implementation, lead time was reduced by more than 50% for operational
processes (see Figure A1-1). In these cases, the cost per unit was commonly reduced by 20%
or more, enabling the company to be more agile and competitive with pricing and potentially
secure more business without sacrificing current margin.

Figure A1-1: Lead Time Reductions Experienced by Accuride Corporation Lean Initiatives

LT % Reduction: Manufacturing Processes

55% Average Reduction in 11 Value Streams5

4
10 Value Streams:
3 Heavy Machining Operations,
Light Assembly, Warehouse
2
1 Value Stream:
Bulk Processing
1

0
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

6
Marhevko, Srivastava, and Blair, 2016.
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Even if the market itself is stagnant, lean systems should enable between 50% and 75%
reductions in core transactional processes, such as new product introduction, request for quote,
or the order to cash cycle. This enables the organization to gain new business by being able to
quote first, get to market first, provide a more competitive price, and get paid in a timely manner.
Lean organizations can also identify opportunities to partner with their customers and
suppliers to increase inventory turnover and reduce cycle time, thereby reducing inventory and
cost per unit across the value chain.

How Does It Work?

In deciding to commit the effort to becoming lean, organizations need to understand their key
value streams. Value streams are the processes used to produce the organizations’ products or
services. These can include labor input, flow of materials, and the information needed to meet the
customer’s expectations. The underlying principle of a lean enterprise is the continuous review of
processes and procedures to eliminate waste, improving efficiency and effectiveness of all parts
of the organization. Waste can be thought of as any activity that doesn’t directly contribute to a
product or service that a customer values and will pay for. Waste can include the obvious, such as
rework or nonconforming products, as well as more subtle contributors, such as time waiting for
material or data, overproduction, or excessive transportation of items for processing.
Although frequently thought of as a manufacturing discipline, numerous studies have
shown that lean can be successfully applied to almost any type of process, including service
delivery and support organizations. In finance and accounting, consider the wastes of approval
steps that don’t enhance internal controls or of incorrect invoices or inaccurate reports that need
to be reworked.
Organizations typically start with lean operations (often called lean manufacturing),
which is the focus on the core value streams of the organization’s manufacturing and/or
operations. Lean operations is the effective and efficient flow of what’s being delivered, whether
it’s a product or process. Lean is simply about flow. If you can flow your products more quickly
through the processes and reduce lead time, then the productivity will increase and the cost per
unit will decrease.
The next level is to achieve the effective and efficient flow of data/information
(transactional lean). There is generally a limit to how much core value streams of the business can
be optimized given that they are typically dependent on the accurate and timely delivery of data
from outside their span of control. Within the business, these support functions typically include
engineering, supply chain, quality, environmental health and safety (EHS), sales and marketing,
human resources, finance, IT, legal, and so on. Very few of these transactional teams typically
provide the actual product that the customer is buying, yet they are a necessary part of the
business’s structure of support.
It is their responsibility to develop, manage, and execute their necessary systems in such
a manner that enables the most efficient (flow) and effective (quality) implementation of services.
It isn’t unusual to see dramatic reductions in lead time (greater than 50%-75%) and an 80%-90%
reduction in errors and rework (see Figure A1-2).

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Figure A1-2: Lead Time Reductions Experienced by Accuride Corporation Lean Initiatives

LT % Reduction: Transactional
69% Reduction in Five Value Streams
3

0
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Should an organization start lean via the traditional lean operations route or should
it start at the transactional levels? Is it possible to successfully start with the transactional
processes first? The vast majority of companies begins with lean operations, but imagine
the change in perspective of how lean could be deployed if it’s first started in the business’s
transactional processes. How fast would the rest of the business follow through with execution
when the transactional process flows are already efficient and effective? Or would it never
get off the ground as the office personnel try to figure out how it applies to them? The
product transformation processes in operations can only be as optimized to the level that the
transactional processes will enable them to be. While it’s easy to get lean value stream numbers
such as lead time, productivity, and cost per unit when dealing with pieces and parts, it would
take a very selfless and servant-based organization to look at itself in the mirror and say, “Let’s
really start at the top.” In the transactional Standard Work (StdW) sample (see Figure A1-3),
nearly 50 professionals were evaluated for how they spent their time. About 10% of it was purely
due to rework and waiting time for late and/or incorrect information. Imagine the reaction
if a direct labor team spent a full 10% of its time on rework and waiting—there would be an
immediate in-depth review to resolve the situation. If the transactional team focuses on initially
only that portion of its system wastes, then the organization has an opportunity to redeploy 10%
of staff to other parts of the business.
At this phase of the lean journey, the operational pieces should be flowing well. As
the core value streams are optimized in flow and quality, the external processes can then be
optimized to support them more effectively. For larger, multisite organizations that are vertically
integrated, shipping intercompany is a common occurrence. Managing those system orders
efficiently (flow) and effectively (quality) will further enhance the agility of the business. By
focusing on the product and process transactions across the organization, the business will take
its next great leap in reducing its lead time. Again, the adage “Time is money” will become even
more transparent as the egregious wastes in the system are exposed.

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Figure A1-3: Case Study Results of General Utilization of Time in a Transactional Team

General Utilization of Time

Transactional Team
8%
7% 8% ■ (1) – Value-added work (key streams)

15% ■ (2) – Rework (correcting errors)

■ (3) – Meetings
29% ■ (4) – Phone calls
3%
49% ■ (5) – Emails/email communication

11% ■ (6) – Queue and waiting time

■ (7) – Ad hoc requests/drop-in requests

Sample data across an internal transactional team of 50 professionals. Ten percent of the time was identified as
nonvalue-added (rework, queue, and waiting time). If 75% of the process lead times are recovered and efficiencies
are gained, it is anticipated that 10% of the time could be recovered.

Benchmarking…Looking through Others’ Eyes

For organizations that recognize the value of lean and are looking for ways to integrate it with
their business strategy, a valuable tool is to benchmark value stream performance against
organizations in the same industry, organizations performing similar processes, or even
outstanding organizations in other fields. Global supply chain expert Bill Waddell states, “Seeing
your business through the same lens won’t lead to the changes you hope to make. Instead, you
must learn to look at the business through Toyota Eyes…” (or through the eyes of whomever you
are looking to benchmark).7
How do we force ourselves to look at our organization through that different lens?
How do we then apply that feedback to the business strategy? What are the key process steps
that are needed to effectively link our functional initiatives with that of the business strategies?
And then, what are the major steps needed to harness that aligned power to develop a lean
organization? How does one approach looking at their business objectively to see it for its
possibilities? There are generally two paths that business teams can consider. They can:
1. Pay for a third-party evaluation and secure support from a consultant organization.
2. Find a way to conduct their own benchmarking and do it themselves (DIY).

Both have strong pros and cons. A third-party evaluation can be quite costly, but it
may have a shorter overall lead time than the DIY method. There’s the benefit in selecting a
partner that will not only help to identify the opportunities but also help the team get started
on its journey without becoming a permanent cost fixture in the organization. There are many
reputable and strong third-party lean practitioner resources out there. They seem to follow a
general approach:

7
Bill Waddell, “Toyota Eyes,” www.bill-waddell.com/leadership-and-culture/103-toyota-eyes.
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• They will aid in the initial assessment of the organization and facilitate the creation of the
initial current state value stream maps (VSMs).
• They will provide the business with basic lean and systems training.
• They will stand back and let the team members of the business do the legwork—execute
the physical actions—while the third party monitors from the sidelines. They are, after
all, teaching the business “how to fish.” If the third party is doing the execution of the
tasks and the implementation of the systems, the business’s ownership of the improved
processes generally won’t hold up over time.
• As the business evolves through its phases of improvement, the third party will bow out,
leaving the organization to stand on its own. Depending upon the organization’s size and
complexity, this partnership can last from two to four or more years.
• Most critically, the third party will fire the organization, its own customer, if it isn’t ready or
able to effectively commit to the journey. How many of our organizations would willingly
turn away business?

Third-party partners can be powerful and effective. When the in-house team doesn’t know how
or where to start, this may be a good and quick option.
The DIY method also has its own pros and cons. Depending on one’s perspective,
a main detractor may be the longer lead time for implementation. And time, as we know, is
money. Regardless, as long as the organization starts on its journey, it can get there with the
commitment of the senior leadership team. One strong positive is that the organization’s unique
culture is cultivated along the way. People who are uncomfortable engaging in the process often
self-select by leaving. Aside from not having to provide severance packages, this approach can
be smoother for a company.
There are several large and inclusive not-for-profit organizations (NPOs) that can help the
DIY-er. These NPOs often host a variety of conferences, webinars, and site tours. They provide
local training and mentoring support with benchmarking opportunities. The level of engagement
with these entities is up to the organization: They can do as much or as little as they want. These
organizations have survey tools that businesses can conduct on themselves. As companies work
on their lean journey, they can compete with others via these entities’ recognition programs. When
an organization is ready to be objectively evaluated, it can apply for recognition. And, essentially
for the cost of travel and expense (T&E), these organizations will send subject matter experts
(SMEs) to the business and evaluate its level of lean execution. Just a few examples include:
• The Baldrige Foundation: The Baldrige Foundation manages the Baldrige National
Performance Excellence Program in the United States. The President of the United States
presents this award. The Alliance for Performance Excellence manages the Baldrige
Performance Excellence Award at the state level. Almost every state participates in
this program. This process is an amazing way to learn how to develop, implement, and
manage performance excellence systems and then participate in site assessments to see
how others apply the techniques. The American Society for Quality (ASQ) supports the
Baldrige Performance Excellence process.

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• The Association for Manufacturing Excellence (AME): AME’s recognition program is

the AME Manufacturing Excellence Award. AME focuses on developing a mentoring
relationship. Like Baldrige, its rigorous application process forces an organization to be
objective and introspective in its review of itself.
• The Shingo Institute: Shingo’s recognition is the Shingo Prize for Operational Excellence.
Shingo is globally regarded for its in-depth evaluation of an organization’s continuous
improvement systems.
• The Japanese Union of Scientists and Engineers (JUSE): JUSE’s recognition is the
Deming Prize.
• There are also several lean system self-assessment tools. Aside from those provided by
the organizations listed above, Waddell’s 100-question lean survey is very intuitive.8

Regardless of the method of support that’s chosen for a business’s lean journey, it should
enable an organization to rapidly better itself so that it can provide more value to its customers
and become more competitive.

Lean Results
Depending on the type of key value stream(s) the organization has, experience in working across
dozens of value streams has demonstrated that it isn’t uncommon to see the following types of
results from effective lean programs:
• More than 50% reduction in lead time for operations-based processes. This can vary
depending upon the process type: heavy assembly/component throughput, large-scale
machining, capital equipment building, and so on. The more manual the processes, the
more the lead time can generally be reduced.
• Between 20% and 40% reduction in lead time for batch-based systems such as painting,
heat treating, chemical baths, bulk recipe batches, and so forth, where batches of
products are produced simultaneously.
• Greater than 70% average reduction in lead time for transactional and data flow-based
processes.

In a case study of eight value streams across a diverse set of processes including batch-
based, heavy machinery, and light assembly processes, the overall average of improvements was
a 55% average reduction in lead time, which enabled a 60% average increase in productivity and
an average 25% decrease in cost per unit.
Figure A1-4 shows the change in productivity as a function of a reduction in lead time.
Figure A1-5 shows the reduction in cost per unit as a function of a reduction in lead time. The
individual results appear to show minimal correlation between the two variables, yet the change
in lead time always resulted in an increase in productivity. The difference in results reflects the
diversity of the processes.

8
Bill Waddell, Lean Systems Audit, 2010.
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Figure A1-4: Case Study Results of Changes in Productivity as a Function of Change in Lead Time

8 Mfg Value Streams: % Change in LT compared to % Change in Productivity

125%
% Change in Productivity

100%

75%

50%

25%
Avg LT 55%
Avg Prod 60%
0%
0.30 0.40 0.50 0.60 0.70 0.80 0.90
% Change in LT

Figure A1-5: Case Study Results of Changes in Cost Per Unit as a Function of Change in Lead Time

8 Mfg Value Streams: % Change in LT compared to % Change in CPU

50%

40%
% Change in CPU

30%

20%

10%
Avg LT 55%
Avg CPU 25%
0%
0.30 0.40 0.50 0.60 0.70 0.80 0.90
% Change in LT

Risks to Lean Implementation Success

Successful implementation of lean inevitably results in the need for fewer people to perform the
value stream processes. This is often where lean gets its bad rap—that “lean” colloquially stands
for “Less Employees Are Needed.” On the surface, this is true, but that doesn’t have to be a
bad thing. Organizations typically face three options in addressing the employees whose current
work is eliminated by lean initiatives:
1. Redeployment: Personnel that are freed up from their nonvalue-added or inefficient
activities should be redeployed within the organization. Trained, experienced resources
provide low-cost additional capacity for the organization. These workers bring a deeper
understanding of the work across functions in the organization, which can be applied

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effectively to future lean improvements. Further, by working

with these employees to find continued suitable, satisfying “Less Employees Are Needed”
work within the organization, the culture of trust builds, Organizations that struggle with
reducing resistance to further improvements. implementation of a lean culture typically
2. Attrition: Some associates simply won’t be able to withstand run into varying levels of resistance to
change due to a perception that the hidden
the systemic changes that come with lean processes and
agenda is really to eliminate jobs.
will opt out. As they leave, and natural attrition happens,
Organizations that succeed with lean
they typically won’t need to be replaced. One company’s
implementation demonstrate a sincere
experience was that, depending on operations type, across commitment to retaining, retraining, and
five baseline lean system implementations, this can range redeploying current employees to make
from 3% to 5% across the business. the organization more successful and jobs
more secure.
3. Layoffs: This should be the last resort for the organization.
Everyone has experienced changes in business conditions This commitment can be demonstrated with
Hoshin Kanri, where the linkage between
that preclude large-scale redeployment of employees or
initiatives, strategies, and resources is agreed
timely reductions through attrition alone. The sidebar “Less upon at all levels of the organization.
Employees Are Needed” highlights ways that organizations Part of building trust with employees,
can keep the necessity for layoffs from derailing progress on of course, is clearly and candidly
implementing lean. communicating risks and opportunities.
There will always be cases where there aren’t
At least two Fortune 500 companies have demonstrated opportunities for growth and expansion.
the use of redirected personnel as ad-hoc problem-solving teams Some employees will leave voluntarily,
either due to an uncertain future or an
across the business. This powerful “self-funding” method brought
unwillingness to adapt to the new culture. As
significant savings to the bottom line while simultaneously cross- a last resort, layoffs may need to occur. The
training these personnel to be effective in a variety of roles. question is whether the workforce sees that
One business used redirected personnel to replace third-party all other alternatives have been exhausted.
contractors in various capacities. Generally, though, when attrition
or growth openings occurred, personnel from these pools were
sourced from within. Their bottom-line impact well exceeded the expense of their “temporary”
retention until a position was available. In one business, no new personnel were hired over a
two-year time frame while the business grew both in size and market share.9
If the organization is solely fixated on the “less employees” aspect of lean, it may likely
achieve short-term gains but not realize long-term sustainability. Achieving the subsequent levels
of lean improvement will become culturally challenging to achieve. This is a result of two factors:
1. When the leadership team’s language focuses on “belly buttons or toe tags,” its focus
isn’t effectively on the improvement of the business.
2. Losing the trust of the workforce means that the commitment, creativity, and
perseverance needed to make meaningful change will likely not be applied to the
challenge of improving processes and procedures.

9
Marhevko, Srivastava, and Blair, 2016.
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Appendix 2: Implementing Lean

10

So where does one start? How does an organization leverage the functional linkage from the
strategic plan to the functional teams and enable lean to happen concurrently? There are
hundreds of businesses that have been successful, and there are simply too many books to cite.
Each of the models out there has worked for someone. What will be the approach methodology
that will work for your business?
From a transactional lean perspective, many specialties are now arising. There’s lean
accounting, lean sales and marketing, lean engineering via mastering lean product development,
lean supply chain and logistics, and lean HR, among others.11 These resources should remind a
serious leadership team that lean isn’t just in operations.
There are many lean “tools” to leverage at the operations level. Many of these translate
equally well into the transactional level, such as value stream mapping, 5S analysis, kanban, and
poka-yoke. One that isn’t as commonly translated, though, is the power of applying Standard
Work (StdW). It’s easy to grab an industrial engineer with a stopwatch to determine the best way
for an operator to load piece X into machine Y and then do steps A through Z. Imagine translating
this type of breakdown to maintenance personnel, financial personnel managing credit/debit
memos, supplier quality engineers, software engineers, laboratory technicians, and so on. Where
appropriate, conducting StdW analysis on indirect labor positions can be very powerful. Personnel
tied to operations add value to the business and can be related to the variable fluctuation of
sales. Those in transactional positions need to optimize their processes as much as is feasible to
maximize margin potential. The basic tenets of lean apply across the business.

Aligning Key Value Streams across the Business Enterprise: Both Product and Transactional
Jonathan Chong’s article on enterprise-wide value stream mapping, “Practitioner Briefing on
Enterprise-Wide Value Stream Mapping: Create a Vision of Your Company That Really Puts
Your Customers First,” describes how a business can look at itself from that 50,000-foot level.12
Chong identifies five main components in an enterprise-wide VSM:
1. Transactional: The marketing and sales value stream.

10
For more extensive information on lean and lean accounting, see the following related SMAs: Lean Enterprise
Fundamentals and Accounting for the Lean Enterprise available at www.imanet.org.
11
Brian Maskell, Bruce Baggaley, and Larry Grasso, Practical Lean Accounting: A Proven System for Measuring and
Managing the Lean Enterprise, Productivity Press, 2003; Ade Asefeso, MCIPS, MBA, Lean Sales and Marketing, lulu.
com, 2013; Ronald Mascitelli, Mastering Lean Product Development: A Practical, Event-Driven Process for Maximizing
Speed, Profits and Quality, Technology Perspectives, 2011; Paul Myerson, Lean Supply Chain and Logistics Management,
McGraw-Hill, 2012; Dwane Lay, Lean HR: Introducing Process Excellence to Your Practice, CreateSpace Independent
Publishing Platform, 2013.
12
Jonathan Chong, “Practitioner Briefing on Enterprise-Wide Value Stream Mapping: Create a Vision of Your Company
That Really Puts Your Customers First,” TBM Consulting Group, March 2013, http://beta.tbmcg.fr/whitepaper_assets/
ManagementBriefing_Value_Stream.pdf.
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2. Transactional: A product development value stream. (See

“Product Development in the Automotive Industry” for an Product Development in the
example of a product development value stream.)13 Automotive Industry
3. Operations: An operations value stream. The automotive industry has a very well-
4. Transactional: The IT infrastructure showing data flow. defined model issued by the Automotive
Industry Action Group (AIAG) called
5. Transactional: The supply chain (and logistics) value stream;
Advanced Product Quality Planning (APQP).
this can include several perspectives: Product planning is commonly executed
• The planning management of receiving goods, including across a “staged gate approach.” APQP
the development of pull signals via kanban markets. identifies five stages. (Other product
development systems identify six, seven,
• The planning management of outside service providers
or more gates.) Each of these gates should
(OSPs) who add value to the product outside of the be considered when an organization is
“four walls” of the business. conducting its value stream analysis of its
• The planning and coordination of shipping and logistics product development system. Some key gate
considerations (per AIAG) are:
of the finished goods and services.
1. P lanning and defining of the new
Figure A2-1 is a high-level concept of a VSM for a multisite product or process. This is typically
manufacturer with the transactional processes, operations, and supply based on voice of the customer and/or
chain links shown. A formal set of VSMs would have much more marketing analysis.

information for specific value streams. The intent here is to show the 2. P roduct design and development.
This involves prototype development
complexities of intercompany shipping across multiple sites.
and review of feasibility of providing the
Today, organizations seem to first focus on the third product or process in a manner that meets
component, the operations’ value streams. In the model shown, strategic objectives.
organizations would focus on achieving that 50% reduction in lead 3. P rocess design and development, i.e.,
time from within the “four walls” of the various sites. This can be creating and testing the new product
done simultaneously across the sites if the local personnel are and/or process. This includes both the
physical creation of the product/process
effectively trained in the methodologies.
and also the manufacturing or system
There are often rapid and sizeable returns within the “four development across which the product/
walls” of the various sites. As the sites work across this journey, the process will be performed.
teams often recognize the need for the transactional processes to 4. P roduct/process validation through a
catch up, traditionally in Sections 2, 4, and 5, as shown in the model. pilot. The process is verified as effective.
As the company expands its focus, Section 1 gets incorporated into 5. F eedback, assessment, and corrective
the fold along with the intercompany product and process logistics. action. The new product or process
is issued. Data across the process is
It’s critical to note that the quality management system needs to be in
evaluated and fed back into the overall
good order for this to occur. system for Lessons Learned and Change
Management.
Incorporate Partners: Customers, Supply Chain, Contract Services:
Largely Transactional
Continuing that path of “inside out,” the final phase of focus (Section 5 in Figure A2-1)
includes all partners external to the organization. Whether the organization does operations or
transactional processes first, working with the external entities in the last phase makes the most

13
Automotive Industry Action Group, Advanced Product and Quality Planning and Control Plan (APQP), Second Edition,
23
2008.
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Figure A2-1: Conceptual Value Stream Map for a Multisite Organization

4 ERP

1 2 New Product Order Entry;

Sales & Marketing Development Information Flow HR Sourcing
Transactional Flow LT Before: 180 days LT Before: 45 days
LT Before: 180 days LT Before: 5 days
LT After: xx days LT After: xx days
LT After: xx days LT After: xx days

Site B
Value Stream B
3 Site A LT Before: 20 days Customer Delivery
Value Stream A LT After: 10 days
Operations Flow LT Before: 5 days
LT Before: 30 days Inv LT After: 3 days
LT After: 15 days
Site C
Value Stream C
LT Before: 15 days OSP 1
LT After: 7 days
LT Before: 15 days
LT After: xx days

5 Supplier A1 Supplier B1 Supplier B2 Supplier C1

LT Before: 60 days LT Before: 60 days LT Before: 60 days LT Before: 30 days
Supply Chain
LT After: xx days LT After: xx days LT After: xx days LT After: xx days

LT X Days
6 V/A Y Minutes

sense. Put your house in order first before going outside. This sets an example for the supplier
and gives management a clear view of what to ask for.
There are a few large categories of entities to consider in the scope of external partners.
These would typically include:
a. Customers: Front-end transactional processes, such as sales and forecast planning, order
entry acknowledgements, order entry processing, and so on. Back-end transactional
processes, such as logistics delivery, sequencing, billing, and the inevitable debit memo
processing.
b. OSPs: Supporting their front-end transactional processes, such as sales and forecast
planning, order entry acknowledgements, order entry processing, and so forth.
Understanding their back-end transactional process needs, such as logistics delivery,
sequencing, and billing.
c. Suppliers: Supporting their front-end transactional processes, such as sales and
forecast planning, order entry acknowledgements, order entry processing, and so on.
Understanding their back-end transactional process needs such as logistics delivery,
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d. Internal/external functions requiring third-party compliance: Financial, quality, supply

chain, and environmental health and safety systems typically have some form of
compliance criteria in which internal or third-party support is needed. Examples would
be the Sarbanes-Oxley Act (SOX), General Agreement on Tariffs and Trade (GATT),
Committee of Sponsoring Organizations of the Treadway Commission (COSO), third-
party quality systems such as ISO 9001, third-party EHS systems such as ISO 14001, local
state environmental and regularly requirements, and industry-specific requirements such
as FDA regulations.

Highly effective businesses can partner with each of these entities proactively to optimize
the relevant processes, reduce waste, and improve both efficiencies (flow) and effectiveness
(quality). The objective is a “win-win” for both the business itself and each outside party.
It can sometimes be very challenging to get the customer partners to the table. Some
customers simply believe that a warehouse of goods is the best way to do business. Helping
them to understand the value proposition of lean can take time and persistence.
Most businesses start with their suppliers and outside service providers. From there,
they grow to incorporate the compliance organizations. They share results to demonstrate
their newfound agility. As lean becomes more recognized for its benefits, some customers are
now creating a pull with their suppliers and are requesting partnered lean system approaches.
Leveraging these opportunities can be financially beneficial to both teams.

A Note on Governance
It’s important that complex organizations implement a steering committee or type of QLMS
council to provide governance to the business improvement efforts. Governance includes
prioritizing projects and resources, sharing best practices, and tracking lessons learned across
all sites and process areas. In the case study organization, utilizing a sound governance structure
drove the velocity of execution across locations in a business unit with six to 10 sites, enabling
the documented results in two to four years. The utilization of Hoshin Kanri is a key component
in enabling the speed of execution.
In the case study model, the company achieved an average of 55% lead time reduction
across the sites “inside the four walls.” When the transactional processes were incorporated
and the overall enterprise map was executed, an additional 25%-30% of working capital was
removed from across the entire value stream.
Another aspect of governance is utilizing product costing tools, such as lean accounting
or activity-based costing (ABC), to identify additional opportunities. When it comes to lean
accounting, accountants should understand that it’s acceptable to have two or more “coexisting”
management accounting methods. When applicable, ABC should be applied for strategic
profit margin analysis of products, service lines, channels, and customers. Lean accounting is for
operational improvement. There are different types of costs for different purposes for different
users of the information.

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Traditional cost of goods sold (COGS) is a critical metric often used to measure
profitability. It has three basic components: materials, overhead, and direct labor. These are
the costs needed to produce the product prior to the application of selling, general, and
administrative (SG&A) expense and taxes. In North America, and depending on the type of
product or process, it isn’t uncommon for materials to be the largest component of COGS.
Oftentimes, this can be 60%-70% of the total COGS. Typically, the next highest contributor is
applied overhead. Upper management’s driven focus on lean strictly to reduce labor costs can
be very misplaced. Consider the investment tied up in the raw materials, work-in-process, and
finished goods inventory and the “overhead” waste of moving it all around within the four walls
and then across the enterprise and the components of inventory carrying cost. This isn’t about
low-cost country sourcing or beating suppliers into cost submission; it’s about purely reducing
the amount of what is on hand and only buying what’s truly needed. Appropriate governance
ensures that the entire organization focuses on solving the right problems. Recall the previous
discussion on the equation correlating shareholder value to ROI (profitability divided by
investment). Effective lean programs work on both parts.

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Appendix 3: KPIs
Imagine if every day every employee in an organization, from the bottom of the organization to
the CEO or managing director at the top, could answer this single question: How am I doing on
what’s important? The first half of the question can be easily displayed with a KPI dial in a BSC or
dashboard, with the actual compared to the target. But it’s the second half of the question that is
the key, and the important KPIs are derived from the strategy map.
Measurements are far more a social system than a technical one. Selecting and
measuring KPIs are critical tasks. You get what you measure, and a strategy map and its
associated BSC serve a greater social purpose than a technical one (although information
technology and software are essential enablers). Performance measures motivate people and
focus them on what matters most.
The risk and peril of the BSC involves the process of identifying and integrating
appropriate cause-and-effect linkages of strategic objectives, which are each supported by the
vital few measures, and then subsequently cascading the KPIs down through the organization.
KPIs ultimately extend downward into OPIs that employees can more easily relate to and directly
affect. OPIs are typically displayed in dashboards. Remember, the strategic objectives are
located in a strategy map, not in a BSC. The KPIs in the BSC reflect the strategic objectives in
the strategy map.
The primary task of a strategy map and its associated BSC is to align the managers’
and employees’ work and priorities with multiple and linked strategic objectives that, if
accomplished, will achieve the strategy. This linkage is documented in the Level II Kanris. This
consequently leads to realizing the end game achieving the organization’s objectives.
A superior strategy map, BSC, and linkage system embraces employee teams
communicating among themselves to take actions rather than a supervisory command-and-
control style from senior managers. An executive team that micromanages the KPI performance
of employees can be corrosive. If the strategy map and cascading KPI and OPI selection exercise
is done well and subsequently maintained, then higher-level managers need only view their own
score performance, share their results with the employee teams below them, and coach the teams
to improve their KPI and OPI scores and/or consider replacing or deleting existing KPIs or OPIs.

Selecting KPIs
When organizations implement a BSC, how does anyone know if its measures—the KPIs—
support the strategic intent of the executive team? Are the selected measures the right
measures? Or are they what the organization can and has been measuring rather than what it
should measure? And is the purpose of the BSC only to better monitor the dials rather than
facilitate the employee actions needed to move the dials?
In an enterprise and corporate performance management (EPM/CPM) framework, the
results and outcome information from the various EPM/CPM methods should answer three
questions: What? What does that mean? And what’s next? In most cases, the BSC only answers

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the first question. Worse yet, answering the “what” may not even focus on a relevant “what.”
Organizations struggle with determining what KPIs to measure. A technique to identify KPIs is to
examine each strategic objective in the strategy map and ask, “What two or three metrics can
monitor the progress toward accomplishing the strategic objective?”
It’s quite helpful to monitor the KPIs in a graphical format to look for shifts, trends, and
cycles. This helps when determining the next course of action. Forrest Breyfogle’s book Business
Deployment Vol. II: A Leaders’ Guide for Going Beyond Lean Six Sigma and the Balanced
Scorecard provides a detailed approach on how to break down KPIs and manage them in a
predictive manner.14
When talking about KPIs, businesses can sometimes go overboard. It isn’t uncommon to
see PowerPoint presentations with reams of pages that upper management doesn’t have time
to review. After the first 15 to 20 pages, the team is saturated. Teams developing those Tier I
KPIs with their underlying Tier IIs and Tier IIIs aren’t really adding value to the business: They are
verifying (again) what’s already known. What is the value of all that effort? While all this analysis
is going on, the resource time needed to actually execute problem solving can be starved.
Organizations should apply their lean lens to metrics and KPIs as well.

Suggestions for Developing KPIs

The right side of the Hoshin Kanri identifies the KPIs of the organization. There are varying
approaches on how to develop these. As mentioned earlier, a blend of leading and lagging
indicators helps to control the front end so that the back end follows. Figure A3-1 shows some
suggested components that can be included in a KPI graph.

Figure A3-1: Sample KPI Graph Format for Warranty %COGS

History (2-3 years) Arrow for desired direction

Warranty % COGS
5

4
Performance Goal
3

0
1

ar

r
ay

pt

c
Ju

Oc
Ap

De
No
m

Fe

Au
Ja

Ju
ar

ar

ar

Se
M
Co
Ye

Ye

Ye

Point of Comparison Current Performance

14
Forrest Breyfogle, Integrated Enterprise Excellence, Vol. II: Business Deployment: A Leaders’ Guide for Going Beyond
Lean Six Sigma and the Balanced Scorecard, Bridgeway Books, 2008.
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• Some form of history (if available) should be provided to tell the story of overall
performance. It’s a general practice to stay within three years because systems and metric
definitions change over time. When applying for general performance awards, this history
is often reviewed as part of the evidence of sustainability.
• A point of comparison (POC) should be provided where practical. A POC can be a
benchmark reference, but it shouldn’t be confused with one if it isn’t truly the best in
class for that measured feature. A POC enables more flexibility where comparisons can
be made to any of the following sources or “levels” of data comparisons: international,
national, state, city, industry, competitor, intercompany, interdepartment, and so forth. The
overall intent is to develop an objective comparison with another entity to see where the
organization stands. POCs can work in two ways:

1. If the team is performing negatively to the comparison, it can provide motivation
and clarity that the comparative level can be achieved; if someone else has done
it, so can they. In the real example provided here, the team felt great when its
performance for warranty as a percentage of COGS went from a 5 to a 4—that’s a
20% year-over-year reduction. Without an effective comparison, a team may feel
it has really hit the new low. Yet when faced with the reality of a comparison, it’s
rapidly able to adjust its filter and look at the problem differently. From Year 2 to 3, it
reduced it again by 25%. And yet, it still wasn’t enough. It had sufficient motivation
to know that there was a way to do this in order to recover its competitive position.

The real challenge, though, is that in this example, the customer advised the
business of a competitor’s result in Year 2. The customer took a mandatory pricing
reduction, citing that the pricing was inflated to account for the costs of the warranty.
The business’s choice was to forego the revenue or address its performance. It chose
the latter. When it ended up exceeding the benchmark and showed the customer,
it was able to recover some of the pricing. One can only assume that the customer
possibly shared the business’s new performance level with the competitor to extract
further cost reductions.

2. If the team is performing positively to the comparison, it can provide a sales or
marketing advantage that can be leveraged.

• A performance target or objective needs to be identified. This shows the team how
the KPI is performing to the plan. KPIs monitor the progress toward accomplishing the
integrated strategic objectives that comprise the strategy (and ideally are derived from a
strategy map). The KPI target can be flat or stepped as progressive goals are achieved.
• The current performance of the KPI is tracked on either a rolling 12 (last 12 consecutive
months) or in a year-to-date format. The idea is to observe the overall behavior of the
process over time.
• The arrow of desired direction helps the reviewing audience understand the performance
intent. Which way is desired? Up or down?
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Suggestions for Managing KPIs

There are a few challenges in interpreting graphs at the leadership level:
1. The data is usually collected monthly; there aren’t usually “hundreds” of data points
at “high check” frequencies to assess for performance. This is another benefit of the
use of leading indicators.
2. People tend to “over-characterize” the performance of a process. Two points over
average may be misidentified as a “trend.” One point “higher than the rest” may be
labeled as a “spike.”
3. Most critically, many of these KPIs aren’t typically expected to be distributed
normally. Depending on the type of KPI, it’s often hoped that it will tactically trend
(or shift) up or down. Margin, revenue, or market share perpetually going up may be
considered to be a great thing. A flatlined part per million (PPM) at zero would also
be quite nice.

By applying a few of Shewart’s basic principles of control, a less reactionary

interpretation of the KPI performance can be made and enable people to focus more on
reducing the underlying causes of variation.15

Figure A3-2: Sample Shewart Chart Demonstrating Shift Figure A3-3: Sample Shewart Chart Demonstrating Trend

data before average new average data before average

10 10
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
8 or more consecutive points below the average 6 or more consecutive points going up or down
0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Per Shewart, a shift has occurred when there are “8 points in a row above or below the
average” (see Figure A3-2). Other references, depending on the surrounding circumstances,
will cite five, six, or seven points. The bottom line, though, is that “two or three” points in a row
above or below the average doesn’t make a trend. Think of it this way: For a normal process, you
should have an equal chance of getting a value above or below the average—the same odds as
flipping a coin. If you flipped a coin twice, there’s a good chance you could get two consecutive
heads or two consecutive tails. The odds of getting the same face decreases dramatically with
each consecutive flip. By flip five, six, seven, or eight, the possibility is there that you would

15
AT&T, AT&T’s Statistical Quality Control Handbook,1985.
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still be getting a consecutive head or tail, but the probability is getting close to nil. It just isn’t
normal. At that point, you’re looking closely at that coin. From a process change interpretation
perspective, there really isn’t any shifting going on unless there are more than five to eight
consecutive points in a row above or below that average.
A similar point is made to trend behavior. An increase or decrease of two or three
doesn’t make a trend. There needs to be six or more data points going consecutively in the
same direction for the process to be considered trending (see Figure A3-3).
A “spike” in performance can be considered for removal from the data set if there is a
verified special set of conditions that caused the metric to behave that way. If a special cause isn’t
identified, then that super-high or low point may just be part of the normal variation of the process.
In summary, KPIs create visibility and accountability. Too many of them create waste and
inability to leverage one’s human resources to execute the fixes. Identify the key leading and
lagging KPIs that are needed. Use Hoshin Kanri to connect the KPIs from the business strategies
to the tactics and stick to the vital few. Develop an introspective review of the transitional
processes and make them more efficient.

31