An Interview with Ron Harper from Cogent Power
By Gary Kerr, Leveraged LEAN
In 2016 Gary Kerr interviewed 2018 AME Conference International Keynote Speaker Ron Harper, President at Cogent Power in Canada. The interview was about his organisational restructuring around Value Streams. This is what Ron had to say.
Ref: Reorganise into Value Streams
1. What was the previous structure of management and how does this differ from the current Value Stream structure?
There have been three evolutions to our management organization change. We started out with a traditional functional organization – Plant/Production management; Materials & Logistics Management; Quality Management; Sales Management, etc. In 2006 we changed our organization to what I would call a “process management” structure – Order Fulfillment; Supplies and Incoming Materials; and Production Managers at the three main process routes – along with a continued functional oversight by Quality. In early 2008 we have changed to Value Stream management, where each of the three value streams has a business manager that overseas all operational and business aspects of the value stream. Supporting the Value Stream Leaders (VSL) we have a group of “Governance” leaders who oversee standards and achievement of desired results in areas such as quality, human resources, finance and general sales/mktg. All other work is organized into the value streams.
2. What were you trying to achieve in reorganising into Value Streams and was this achieved?
Our primary objectives were to create clear ownership from the supplier to the customer of similar product families; to eliminate the wastes of excessive functional work; to align the maximum number of resources in the company to the specific value generating parts of the business. In doing this recognition is gained that the primary value we are delivering to customers is through the value streams, and that governance resources such as HR, Finance, Quality exist to support and lead the value streams to higher levels of performance in the reduction of wastes and the creation of customer value. This established the premise that “departmental structures” were in of themselves non-value adding. We also expected to eliminate “cross functional” thinking, as the functions were all within the value stream.
3. How did you go about planning, implementing, measuring and supporting the change (PDCA)
We identified the three value streams and aligned the “functional” or process departments into the value streams, except for governance teams (finance, HR, quality). We recruited (internally) and trained three value stream leaders to oversee the transformation and to be trained on the VSL role, and the objectives of the change, and the expectations of the improvements from the change. One value stream was formed first and prototyped for six months. The other two value streams were organized from their previous structure after that. A lot of information sharing and training went into the change, as many of our team’s jobs changed. For example our inside sales team under the previous organization (entering orders and communicating with customers only – then handing off to production) changed to become also the primary production planners – so they not only took the orders for their value stream, but they managed the production schedule from date of order to date of shipment, and essentially closed the loop to the customer on the order fulfilment process.
4. What did you learn and what would you do differently? What advice would you have for others implementing similar changes?
Learning – there were several significant challenges, all related to people. The VSLs role is very broad including financial P&L responsibility – essentially a mini-general manager. This was a long transition, and in fact we are still transitioning this fully, as most people do not come into this job with a full experience or view on production, sales, finance and the full extent of their business scope. This takes a lot of coaching and mentoring. As well the Governance Leaders needed to understand their roles and accountabilities for resources and processes that they no longer had direct control over. For example, the Quality Manager still was responsible for overall business quality performance, our processes, etc, but his previous functional team was now dispatched amongst the three value streams. This was for some very difficult because we were asking them to work collaboratively with the value streams, as opposed to their comfort of their functional department, while still improving quality performance. This was also difficult for the team members who moved into the value streams from a functional role, because their accountability increased – they no longer took on a “critic” role and were responsible with the rest of their team for performance. They went from the comfort of a “support” role to one of the front line team working for the customer.
What would we have done differently – we would have brought in at least one VSL from outside the organization with wider experience; we would have spent even more time training and mentoring and coaching the change management process and the new roles of people.
5. How long did it take before the organisation settled comfortably into the new structure?
For it to gain “full maturity” it will take about two to three years, when you are realizing the full benefits of the change, especially considering that we did the initial change in two steps. It was functionally working well in about six months.
6. Were the biggest implementation issues around system design and technical or were they around people and culture?
NO QUESTION – People and culture, seconded by People and Culture.
We implemented about half way through the transformation accountability training that made a big difference, and we are now working on our second year of converting to a much higher level of accountable and problem solving culture. I can speak more on this if you wish, but it has been very impactful.
7. What were the main success factors? (or, what are the failure factors to avoid?)
Main success factors.
a. Pick excellent VS leaders, and coach and mentor the heck out of them.
b. Have a large enough oversight team that is very skilled in the change, the expected benefits and the vision so they can be the coaches and mentors ensuring that the change is happening as planned, that there is no slide back, and that the culture and people are positive and moving in the right direction.
c. Make sure there is a strong environment of trust, and that the team is ready for the more diverse responsibilities in the value stream.
d. Sell in terms of what the benefits will be to customers.
e. Make sure that everyone understands the concept of value added; and that all other activities are either non-value added or wastes. Most functional people actually believe they are value added in and of themselves (eg, Quality), when they really exist only to make the value added resources better.
f. This is a tough change. Make sure that all leaders understand, own and buy into the change and the benefits. There is no room for empire builders in a value stream structure. In fact in our case small functional empires were in fact destroyed through the change.
g. Make sure that you do not change from one hierarchy style to another. Value stream organizations need to be flexible, highly collaborative, forward thinking, problems solvers, and focused on customer value and elimination of waste. There is no room for hierarchical thinking.
Ref: Implement Value Stream Accounting
1. What was the previous structure of cost accounting and how does this differ from the current Value Stream measurement system?
In the cost accounting model we looked primarily at the whole financial statements, and profit and cost by work order, customer and product type. There were lots of shared and absorbed costs into the product profit reports that did not link to the specific costs or activities inside of the stream of value. Now over 90% of the costs are specific to a value stream including staff costs, and only 10% is indirect. This gives a much clearer picture on your true costs in a value stream or product family and specific customers and orders.
2. What do you now measure and how has this provided better support and decision making to those who work in and lead the Value Streams.
We now measure actual costs, not averages or a combination of average and absorbed costs. The absorbed costs would come from functional support groups or teams, and somewhat at the time were functional production process or groups like maintenance. These are now directly measured to value streams and specific orders.
3. What were you trying to achieve in implementing Value Stream Accounting and was this achieved?
We are trying to measure the actual cost of running a stream of value to a customer, thereby identifying sources of cost waste, and designing or solving it out. If it is an absorbed or indirect cost then its impact dilutes and distorts the real costs and is often the largest source of waste.
4. How did you go about planning, implementing, measuring and supporting the change (PDCA)
We put into place a value stream accountant who managed the project and the transformation. The transformation included a change to our general ledger allocating costs to value streams instead of production machines or functional groups (ie. Mtce, quality). This also required a reporting change where all reports were generated and sorted by value stream. This was done in conjunction with the change to the value stream structure, and was vital to giving the new VSLs feedback on their business’s performance. We now present financial statements in terms of value streams and can accurately look at financial performance and take needed action based on the reporting and analysis capability of our Value stream reports – cost, revenue, etc.
5. What did you learn and what would you do differently? What advice would you have for others implementing similar changes?
It was the right thing to do it at the same time we make the VSL change. The information being given must be accurate. We had a couple of incidents where the first couple of statements and reports were filled with errors and legacy conclusions of absorbed costs that made them less reliable. The reporting on a value stream basis must be trusted to be used properly. We also ran both statement in parallel for six months, which was the right thing to do, as people eventually stopped looking at the non-value stream statements (which is what we wanted).
6. How long did it take before the organisation settled comfortably into the new structure?
Once the reporting and information was done about 4-6 months to stop asking for the old information.
7. Were the biggest implementation issues around system design and technical or were they around people and culture?
I think a bit of both. Since the general ledger had to be changed, plus people get comfortable with absorbing costs, then there is a large technical change here. The people factor was mainly in the finance team’s resistance to change. Not a big factor if the technical change works well and it is well and clearly explained what is happening and why.
8. What were the main success factors? (or, what are the failure factors to avoid?)
Waste is much clearer, and many people now see non-value added functions and the waste they are filled with.
Identified areas where we thought we were making money, and in fact losing. Some areas were more profitable than expected.
Statement and cost reporting is now far more precise and is a guide for kaizen improvement events.