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High Operational Autonomy + Low Financial Autonomy: A Formula for Failure

I've have the good fortune to have been in several hundred manufacturing and industrial operations, across a variety of industries, e.g., automotive, chemicals, food, mining, paper, petrochemicals, petroleum, power generation, refining, smelting, waste water treatment, and so on. In each of the large organizations I've observed, the range of performance across their operating plants has typically been from very poor (dangerously so in some cases) to excellent, as demonstrated by a number of measures. As you might expect, the worst ones were typically nasty and had low morale, while the best ones were very neat, clean and highly motivated. Why is it then, that within a given organization, you can have such a wide range of performance? Aren't they driven by the same policies, standards, practices, and leadership? And, if so, shouldn't the results at each of the plants be substantially closer to the mean? And, shouldn't the mean be substantially above that of their average competitor? Apparently not, or at least I haven't observed it yet.

The Cause
Why is this? While the causes are numerous, I believe that a major contributor to this high level of variability and general overall mediocre performance within a given organization, is the low degree of financial autonomy that occurs simultaneously with a high degree of operational autonomy. I also believe this higher level of variability results in a higher degree of failure. Mathematically speaking, High Operational Autonomy + Low Financial Autonomy = Overall Mediocrity + Frequent Failure. As Deming said, "Consistency of process and constancy of purpose are essential."

In my years working with clients, there has always been pressure to reduce costs, and this pressure has only intensified as the years have passed as the globalization of capitalism has taken a strong hold on the world. This pressure is particularly severe when a downturn in the market place occurs, as it has over the past two years. The drive behind this is simple - we, as consumers, tend to buy the cheapest goods that meet our requirements. This drives prices, and necessarily costs, downward. While it's not an absolute truth, it is a dominant human behavior. Manufacturers know this, and so they work really hard to put the cheapest item in front of us, and still make a profit. This tends to drive down prices, and so costs have to come along with that, keeping the pressure on reducing costs.

Now, let's combine that with a tendency to move managers around, for example, changing plant managers every two or three years as is common in many organizations. And, finally, let's top that off with minimal financial autonomy and maximum operational autonomy. It's a recipe for failure. Let's consider this further.

It's been my experience that the site managers at most of these operations have very little financial autonomy. For example, it's common that a site manager running a $500 million operation (capital replacement cost), that is likely spending $300 - $400 million per year in labor, raw materials, energy, contractors, etc., would have to get approval from the VP of operations for a $25,000 capital improvement; or to hire even one additional person; and sometimes to even hire replacements for those who have left, leaving an open employment slot within the organization. On its face, this seems absurd to me. If a manager is good enough to manage such a large operation, shouldn't that manager be good enough to have wide autonomy when it comes to capital and personnel decisions, and to actually manage the business? It would seem so. While I may have only been exposed to those that take this approach, my experience has been that site managers typically have little financial autonomy in this regard.

While having limited financial and personnel authority, it's also been my experience that a typical site manager has wide operational autonomy. What standards are applied? What practices are in place? How well are those practices employed? How do we know what best practice is? And so on. There is a high degree of variability in the application of policies, principles and practices at each plant. For example, in working with a large Fortune 500 manufacturing company, we found that the range of scores in a review of their manufacturing practices, normalized to a 100% scale, was from 36% to 82%, more than a factor of two between the worst and best. We also found that their manufacturing costs (cost of goods sold, in accounting language) for similar products ranged from 50-100%, also a factor of two.

How can this be, particularly with regard to their practices? It's easy enough to understand structural advantages at a given plant giving it cost advantages, e.g., lower energy and/or raw material costs, being closer to market, having lower labor costs in a given area, etc. However, what is more difficult to understand is the wide variation in actual practices. Repeating from above, don't they have the same policies, principles, practices, and leadership? Apparently not, is the short answer. There is a huge variation in the practices at each plant. And very little financial autonomy.

Let's pretend you're a new plant manager and you only expect to be in a given operation for two or three years. It might take 6-12 months to get to know your job - the plant, people, product mix, etc. On top of that, let's add intense financial pressure. Will you be thinking about the impact of your decisions on the business in three to five years? Not likely, particularly if you know you're only going to be there for two or three years. You're just hoping to get through the next couple years unscathed. So you're more likely to do short-term things that cut costs, without much consideration given to the long-term impacts. Some examples include reducing training and employee development, delaying projects, delaying major shutdowns and overhauls, delaying infrastructure work, delaying other maintenance (indeed, cutting maintenance budgets).This works for a while, long enough to get you through to your next job. You have no financial autonomy, so you cut what you can, irrespective of policies and practices. You manage budgets on a monthly and quarterly basis; not business performance on an annual or bi-annual basis. Sadly, the longer term result of this is typically poorer performance. But since most organizations do this, competitive parity prevails and everyone ends up at or near the same level of performance.

The Solution
My view is that site managers should be given more financial autonomy and less operational autonomy; and kept in their positions for a minimum of 5-7 years, so that they will reap the rewards, or bear the consequences, of their decisions in earlier years.

Give them less operational autonomy. What I mean here is, for example, at the corporate level, high operational standards developed in cooperation with the sites must be followed, much the same as safety standards must be followed. For example, operating standards would include: a) every shift running the process exactly the same way for a given process and product - no shiftly "tweaking of the dials"; b) a definitive shift handover process and alignment of all shifts to a specific standard and set of goals that are reviewed briefly each day/shift; c) standards for operator care, tours, ownership and monitoring of equipment condition; d) a process conformance model for assuring process stability for all key process variables and minimizing non-conformances; e) training, development and demonstration of skill sets required for each job; f) production plans which include the maintenance plans, and the production manager being held accountable for meeting this plan; g) routine checks for the quality of, and adherence to, startup, shutdown, and operating procedures and checklists.

Similarly, maintenance standards that must be followed would include, for example: a) high quality lubricants that are filtered to a specific ISO standard for each application, including storage, use, color coding, etc.; b) balancing and alignment of rotating machinery to a specific ISO standard for each machine; c) work management and planning and scheduling standards, along with disciplined adherence to that plan (remember that production will be held accountable for meeting this plan as well - no finger pointing); d) excellence in condition monitoring to detect pending failures early enough to minimize their consequence, and a strong link into maintenance planning; e) excellence in routine PM and inspections, with specific standards/criteria for determining if a defect is present, or absent (for example a PM that says "check motor" would be unacceptable); f) stores and spare parts fully integrated into maintenance planning. The list goes on, but this should be sufficient to illustrate the point of having high standards that must be followed.

All this would be combined with a challenge to all functional groups to work together toward a higher purpose - business success. These standards would be reviewed and assessed periodically by corporate support groups that are competent to support each area identified for operational excellence. No "seagull" audits - swoop, poop, and squawk - would be allowed. The support groups would "own" the problems they found and help the sites to eliminate them, and be held accountable to measure their progress in doing so. More importantly, production and maintenance would work as a team, and would have cross-functional teams and measures to assure this. For example, production would be held accountable for PM compliance, and maintenance would be held accountable for on-time delivery. Thus if maintenance wanted to do PM that affected delivery, they would think twice. Likewise, if production wanted to ignore PM to meet delivery, it would think twice. This list goes on as well, but I hope the points are made.

Give them more financial autonomy. While the actual numbers will vary from one business to another, perhaps a site manager who is responsible for $300-500M in capital replacement value, and/or $300-500M in cost of goods sold, would have signature authority for $1M in capital and for hiring additional people (or reducing people) within 2-5% of the existing levels, or of the levels approved in the annual plan. A good manager needs some flexibility in managing cash and expenses while simultaneously being held to a high standard for operating practices, with these practices being audited annually in the first 3-5 years, and perhaps bi-annually after demonstrating they can hold their performance to that high standard. They must deliver consistent results to the business in terms of gross profit contribution, on-time delivery, and quality product, while maintaining high inventory turns, and while maintaining high operational standards that are demonstrated to be sustainable over the years.

Ron Moore is the Managing Partner of The RM Group, Inc. He is the author of Making Common Sense Common Practice: Models for Manufacturing Excellence, and of Selecting the Right Manufacturing Improvement Tools: What Tool? When?, from the, as well as over 40 journal articles. He can be reached at 865-675-7647, or by email at

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