A comprehensive system for tracking any error in any part of your company to its source -- and preventing it from happening again
In 1986, with sales stagnant at $16 million in an exploding niche, Lifeline Systems Inc., of Watertown, Mass., was losing market share by the handful. Profit margins were dwindling. Arthur Phipps, who was being recruited for the job of chief executive, remembers touring the factory floor and being unable to tell where the manufacturing process began and ended. "That gave me the first clue there was opportunity here," he recalls. He took the job.
Today the company, which makes personal response systems (emergency-help buttons) for the health-care marketplace, is a model of manufacturing efficiency. Take a walk through the factory and you can easily get a handle on how work is processed, by glancing at charts and graphs posted all around on the walls. These "visibility charts," which were Phipps's idea, track trouble trends in each department. "They don't simply track error rates," he says. "They track error sources. That way they provide employees with the information they need to solve problems at their roots." The system has been so successful, in fact, that in 1991 Lifeline won the Shingo Prize for manufacturing excellence.
In every department at Lifeline the battle cry is now to "go for zero" errors. Employees are trained to look at problems as opportunities to tweak the system. In 1989, for example, on sales of $24 million the company issued $120,000 worth of credit memos a month. But records indicated that almost 50% of the units being returned by customers actually worked fine. Clearly, the credit issue was not solely a manufacturing glitch. To track down other sources of the problem, vice-president of operations John Gugliotta was put on the case.
The first thing he did was to have order-entry clerks and managers listen to customers and tally why credits were being issued. They discovered that wrong addresses, phone numbers, and subscriber numbers were the leading errors, primarily because salespeople had no formal order form to fill out. Customers were often given misinformation about products because the order clerks lacked product knowledge. Customers were often overcharged because the database listed them in the wrong buying group. "We found there was a communication gap between the customer and sales, and sales and manufacturing," says Phipps. With this information, Gugliotta was able to isolate the factors he would then track on the visibility charts.
Order forms were created; order clerks were taught about the product; the database was cleaned up and updated. By watching the charts, employees began to know what was happening and why. The result? Today two clerks (not six as in the old days) and one supervisor process $40 million worth of orders annually, and the monthly credit tab is down to the $20,000-to-$40,000 range.
"One of the great things about these charts," says Phipps, "is how they delegate problem-solving responsibilities through the ranks. I can now go on vacation and not have to worry. I know if a problem crops up, employees and managers are trained to handle it."
In the following text Phipps gives you a glimpse of the thinking his company goes through when it confronts a problem -- in this case the overissue of credit memos -- and he and Gugliotta tell how the charts are then devised to track and eliminate the causes of that problem.
Comment: What's the Incentive?
"We don't offer specific incentives to drive errors to zero. It's just expected that everyone will want to do the best job possible. We do have a compensation expert evaluating how we pay people now, though, to see if some sort of bonus system is appropriate." -- Phipps
Upping the Ante
"In 1990 the scale on the graph [credit memos issued, by month] topped out at $200,000; in 1991 we reduced the top number to $100,000. In 1992 we'll reduce it again, to $50,000. You want this graph to show activity and magnify problems so that you still feel compelled to go for zero. If you left the scale at $200,000, people would think the job was for the most part finished, and they would rest on their oars. The enemy of continuous improvement is complacency." -- Phipps
Going for Zero
"If you go for 25% improvement, you simply squeeze the system -- refuse to issue 10% of the customers credit here, clean up a few things on the database, give manufacturing a little better customer information -- but you are stuck with the same operating system. If you go for zero defects, you must engineer an entirely new design and process. When you allow any amount of error to be institutionalized, you wind up paying for it somewhere. It's that overhead that I want to eliminate. For instance, I'm sure if we got credit memos to zero, we could eliminate some work in the finance department." -- Phipps
Giving Credit Where It's Due
"The graph shoots up [in May] because this is where we faced facts and changed the way we reported credits. Before, when something was returned and nothing was wrong with it, we'd send it back with a note saying, 'No fault found,' and we wouldn't issue a credit. Well, the customers obviously had a problem with what we were sending them, so we started giving them their money back and asking them what was wrong. Boy, did they tell us. We found out, for instance, that a leading error source was simply that customers were misreading our price list and ordering the wrong item. We solved that by coming out with an easy-to-read catalog, and that error source is now greatly reduced." -- Gugliotta
Sample Treatment of a Leading Error
"In August and September the leading error was UU, or misquote: a credit due to discrepancy between the actual price and the quote given by the sales representative. It accounted for almost half the $66,000 issued -- our biggest increase in over a year. Why? Because the sales department hastily decided to issue customers in a certain region a discount for upgrading their units. As part of that deal it decided to back-credit customers who had upgraded during September and August. In October this dropped off because we were shipping orders at the correct price. Salespeople have been much better about communicating price changes to us, since we track credits this way."
-- Jim Brent, head of the order-management department
Comment: You Can Track, Measure, andCorrect Anything
"We measure more than 20 performance indicators, not just in manufacturing. Finance tracks hand-cut checks by department and vendor discounts lost. Purchasing tracks late shipments by vendors by looking at the date on receipts, and engineering tracks the number of change orders it issues." -- Phipps
Customers Are Always Right
"The first [error sources] chart that came out had 'customer error' listed as a source, and I got rid of that right away. Customers don't make errors. Customers were ordering the wrong battery. Why did the customer order the wrong battery? We were doing something wrong." -- Phipps
"Every month, by ordering the errors from the most costly to the least, we focus our energy on the first few. [On our chart], the leading source of errors in July, ZZ -- keypunch/pricing -- has dropped back into the pack because we went into the database, found the pricing typo that was causing people to be overcharged, and corrected it.
"The leading causes for order-management errors a year ago -- CC, customer given wrong information; FF, order-management keypunch error; DD, wrong item shipped -- hardly show up today. We've solved them by having clerks educate customers about their orders, by producing the order form and color-coded files, by publishing a catalog, and so on." -- Gugliotta
"Each reason a credit memo is issued is classified according to its source: LSI err (Lifeline Systems Inc. error) is an error that we claim responsibility for. Cust concil is short for customer conciliation. Those are the credits issued to customers for reasons we don't think are our fault, like RR -- customer canceled order after it had been shipped. We take that opportunity to educate the customers about how it costs us $25 to fill an order, so they might be more careful the next time. Syst req, or system requirement, is a legitimate credit such as a coupon or taxes. Ideally, we want credits to be issued for legitimate reasons classified as system requirements." -- Phipps
A Consistent Frame of Reference
"We used to show [payments issued] in absolute dollar amounts, but that made comparing month with month difficult. It's worth the few extra calculations to turn them into percentages." -- Gugliotta
Let Problems Sort Themselves Out
"Often one of the most difficult things to figure out is exactly what to measure. [For our credit memo analysis], employees in the finance department, which issued the credits, and those in order-management noted every reason a credit was issued. Order-entry clerks called customers back and asked them why they were returning the part. All together, we eventually came up with a list of 26 reasons, AA to ZZ. We let this list create itself; we didn't impose what we believed to be the sources of errors."
(For a complete glossary of errors call Jim Brent at 617-923-4141.)