How does a business balance the difference between incremental improvement and massive transformation? Mechanical engineer Paul Stringleman has a few ideas based on the Japanese principles of kaizen and kaikaku.
In an environment of constant disruption, how can a company know when ‘improvement’ is enough or, more importantly, when it’s time to leapfrog its competitors with an entirely new offering?
Consider the jump from candles to light bulbs, from horses and carts to motor cars, from Nokia feature phones to Apple iPhones. Each represented a radical change, a transformative, if not completely new, product that did an important job far better and a lot more easily than its competition. None came from incremental improvement.
In fact, many businesses that were incrementally improving as these new offerings were released were completely blindsided, wiped out of a market that was suddenly moving at an entirely new pace and in a totally different direction. They were unable to keep up.
Most engineers know about ‘kaizen’, which refers to continuous incremental improvement. It is seen as a positive for a business, as indeed it is. Then there’s ‘kaikaku’, meaning revolutionary change or major reform or transformation, as is the case in the examples above. Which does an organisation choose, when it is faced with such a choice?
Does management go for the conservative option of spending less in order to improve return on investment (ROI), and therefore risk being gazumped by a competitor? Or does it boldly leap into the future? Actually, the answer is a careful balance of both, coupled with a strong understanding of the interplay between kaizen and kaikaku.
When ROI turns bad
A while ago I was invited by a well-established, global Australian company to help them develop an automated solution for their distribution centre. One of the first things I was told was that the competitors had been unsuccessful in finding a solution.
The reason for that was because the company had, over a long period of time, worked on continuous improvement measures that had taken them from an average level of productivity to a level at the high end of the manual spectrum.
Automation, however, could deliver performance that was far higher than manual on a per-worker basis or a per-square-metre of warehouse basis. But ROI is calculated as the cost of the solution over the benefit of the solution, annually.
When the benefit reduces (because the starting point is higher and the end point is the same) the ROI blows out. As they were already at a good level of manual productivity, the ROI on automation was not nearly as attractive for such a business.
This irked me. I knew that this company could benefit enormously from automation, but I also knew the chances of such a spend being approved were very low. It may be difficult to see the issue here, as productivity was at a good level relative to other manual warehouses.
But imagine if their competitors, who were not nearly as productive as they were, also looked in to their options. Because of their lower productivity levels, the ROI for the competitors on automation would be a lot more attractive. Once their warehouses were automated, they would leapfrog the apparently high-performing business that had been improving constantly and incrementally.
A series of small improvements can often hold an organisation back and perhaps even stifle significant development. This is the ‘kaizen paradox’. Where a kaikaku opportunity exists, the kaizen path weakens the kaikaku ROI.
By focusing exclusively on small improvements, an organisation may miss an opportunity to gain a competitive advantage in costs and customer service. If competitors take a big leap, that organisation will be left behind, still making candles in a light bulb market.
How to decide on kaizen or kaikaku
For many of the most successful organisations, major leaps forward in performance are approached strategically. Kaikaku investments are made before kaizen improvements. ROI limits can harm businesses that have been constantly improving, particularly mature companies with high levels of productivity.
Before embarking on a particular path, businesses should consider long-term requirements and how technology could be implemented. Perhaps industry-leading performance could be achievable in phases if it is planned from the start. Use of an Industry 4.0 approach and modular systems could also significantly mitigate long-term risks.
Strategic improvement plans are more robust when they consider costs that could have been avoided. These might include land and buildings, equipment, technology, labour and the cost or service issues associated with errors, re-builds and returns.
There should be agreement at senior levels that any innovative leaps identified are critical to success and must be planned and scheduled properly to optimise ROI and avoid plateauing, or future waste.
In developing an optimal plan, organisations can develop a well-defined gap analysis, outlining the incremental improvements and innovative leaps they need to either catch up with global leaders or take the global lead. The organisation should have confidence that it has the capability to close these gaps as quickly as possible or can engage partners with the required experience.
As part of that approach, meetings and site tours with industry leaders and technology providers can help gain awareness of current KPIs that are achievable for key processes within an operation.
Every business is striving to improve, but not all improvements are complementary or equal. Opportunities to stay ahead of the competition can be stalled by an organisation’s well-intended efforts. Critical to enduring competitiveness is a regularly reviewed strategic approach to improvement.
The kaizen paradox is a common predicament for many businesses. Investments are made to achieve productivity gains, but in doing so they dilute the business case for a better investment, causing them to plateau at a lower level of productivity.
Once organisations are aware of the potential for investments that create a kaizen paradox, they are better able to consider potential improvements as part of a bigger, longer-term picture.
Paul Stringleman is a mechanical engineer and senior consultant at Swisslog.