Operational Excellence Explained: What Executives Actually Mean by It

Job ads ask for an “operational excellence lead” and strategy decks promise OpEx, without saying what will change on Monday morning. Operational excellence means the core work customers pay for comes out right, on time and at a sensible cost, and gets a little better each month, without depending on a few people who know how to rescue it. Day to day, that means clear standards, measures the team can see and problems solved daily, close to the work.

The largest body of evidence on those routines is the World Management Survey, run from the London School of Economics by a team that includes the economists Nicholas Bloom, Raffaella Sadun and John Van Reenen: firms with stronger monitoring, target-setting and people practices were more productive, a link the authors are careful not to call a cause.¹ To begin, put two or three measures for one process where the team sees them and review them every morning.

Operational excellence applies process improvement, finding and fixing the cause of a repeat problem across a whole organization.

What does operational excellence mean in practice?

In practice, operational excellence means a company’s results come from its system, so they hold on a bad day, in a busy month or while a key person is on leave, and the people doing the work keep finding ways to make it better.

Heroics are a warning sign. When a process has a flaw, someone capable learns to work around it, the workaround looks like dedication, and the flaw stays.

A small courier business where one dispatcher knows which drivers can handle which routes runs well until she is off sick. Then deliveries slip and the owner blames a bad week. An operationally excellent version of the same firm has her knowledge written into a routing rule and a daily look at late deliveries.

A good first exercise is to list three tasks that go wrong whenever one named person is away: there, the work still runs on rescue.

Two roots: Toyota’s factory floor and a 1993 strategy article

The phrase has two roots, and executives often mix them. One is the Toyota Production System; the other is a 1993 article in the Harvard Business Review by Michael Treacy and Fred Wiersema, which made operational excellence one of three ways a company can choose to compete.

Taiichi Ohno and Eiji Toyoda developed the Toyota system between 1948 and 1975, and it was first known as just-in-time production.² Toyota describes two pillars. Jidoka means a machine or a worker stops when something abnormal happens, so an operator can halt the line by pulling a cord; just-in-time means making only what is needed, when it is needed and in the amount needed. Toyota adds that all employees carry out small improvements every day.³ Stopping at once matters because a fault is easiest to trace where and when it happened.

Treacy and Wiersema came at the term from strategy.⁴ They described three value disciplines: operational excellence, customer intimacy and product leadership. In their sense, operational excellence is a relentless focus on reliable products or services at competitive prices, delivered with as little difficulty for the customer as possible. An open strategy textbook that summarizes their work gives Dell, Walmart and FedEx as examples, along with Air Arabia, a low-cost airline based in the United Arab Emirates.⁵ In their 1995 book, The Discipline of Market Leaders, they argued that a market leader picks one discipline to excel in while keeping at least acceptable performance in the other two.⁶

The two meanings call for different decisions. A budget airline that chooses to win on low fares is making the strategy choice; a warehouse where any picker may stop a shipment when a label looks wrong is running work the Toyota way. When a leader announces an operational excellence drive, ask which one is meant: are we choosing to win on price and convenience, or changing how daily work is run? A company can want both.

What are the principles of operational excellence?

One well-known published set of principles is the Shingo Model from the Shingo Institute at Utah State University’s Jon M. Huntsman School of Business. First published in 2008, it lists ten guiding principles in three groups and argues that principles shape the behavior that produces results, with tools in a supporting part.⁷

The institute’s Shingo Prize is named after Shigeo Shingo, who worked extensively with Toyota executives.⁸

Putting principles first answers a common failure: a team copies a board or a checklist without knowing why it exists, and it fades once the consultant leaves. Tools help teams improve processes, the institute says, but they do not answer the question why.⁷

We found no independent trial testing whether organizations that adopt this practitioner-built framework outperform similar ones, so use it as an organized set of ideas and try one principle on one process: “assure quality at the source” might mean the person who enters an order checks it before passing it on.

Five building blocks most programs share

Most operational excellence programs, whatever their name, build the same five things: clear standards for the core work, measures the team can see, a daily habit of solving problems, leaders who spend time where the work happens, and goals that connect the front line to the company’s aims. The World Management Survey scores firms on close relatives of these practices.

The study

Moderate evidence

Almost 6,000 firms in 17 countries, scored on 18 practices: the World Management Survey

Interviewers scored plant managers at almost 6,000 medium-sized manufacturing firms in 17 countries on 18 basic practices in monitoring, targets and people management, without telling them they were being scored. Firms with higher scores were more productive, more profitable and grew faster; the productivity link shrank but held once country and industry were taken into account. Bloom and Van Reenen write that their data cannot establish cause.¹

The survey has since grown to more than 13,000 manufacturing firms across 40 countries and added hospitals and schools.⁹ For cause and effect, the stronger evidence is a small randomized trialrandomized controlled trial: A study that assigns participants to the treatment or the comparison group at random, so the groups start out alike and a difference in what happens next can be put down to the treatment. Random assignment makes the two groups comparable; it does not make the people in the trial representative of anyone else.Full entry in the glossary in 28 Indian textile plants published in 2013: plants given free consulting adopted practices such as daily quality and efficiency review meetings, posted operating procedures and visual displays, and became more productive. Before the trial, the firms had typically not known that these less common, lean-derived practices existed.¹⁰

1. Clear standards: the current best-known way to do the core work, written where people use it
2. Visible measures: a few numbers the team sees every day
3. Daily problem solving: a short review that picks one cause and one owner
4. Leaders at the work: managers who visit the work and coach problem solving
5. Goals that connect: front-line measures linked to what the company promises customers

Clear standards for the core work

A standard is the current best-known way to do a task, written down where people use it. Without one, nobody can tell a problem from normal variation, because there is no agreed normal. A clinic that writes down its check-in steps can see which one causes the queue.

Measures the team can see

At the top of the survey’s monitoring scale, performance is tracked continuously and shown to all staff, often on visual boards; at the bottom, tracking is ad hoc and some processes are not tracked at all.¹ A measure in a monthly report arrives weeks too late; one on the team’s wall each morning arrives while the cause is still fresh.

A daily habit of solving problems

One survey question asks whether process improvements are made only when problems arise, or are actively sought out as part of normal business.¹ A daily habit is how a team earns the second answer: a short look at yesterday’s misses, one cause chosen and one person named to act on it.

Leaders who go to the work

In the Lean Enterprise Institute’s lexicon, leader standard work is a routine of visits to the work, reflection meetings, quick responses to problem signals and mentoring, and, combined with lean leadership behaviors, it changes a manager’s role from primary problem solver to building employees’ ability to solve problems.¹¹ A warehouse manager who starts each shift on the floor, asking what got in the way yesterday, hears about problems while they can still be fixed.

Goals that connect

The survey’s target questions ask whether goals mix financial and non-financial aims, link through business units to each person’s expectations, and are demanding but attainable.¹ A team that knows how its on-time rate feeds the company’s promise to customers can make trade-offs without asking each time.

To find your own starting point, score one team on each of the five blocks from zero to two and work on the weakest first.

Further reading

• 

  The Toyota Way: 14 Management Principles from the World's Greatest Manufacturer

  by Jeffrey K. Liker

  Liker's account of Toyota's production system, the factory-floor root of operational excellence that this article traces.

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What is the difference between operational excellence and continuous improvement?

Continuous improvement is the habit of making work better in small, repeated steps. Operational excellence is the wider condition that habit serves: reliable work, standards that hold each gain in place and, in Treacy and Wiersema’s sense, a choice about how the company competes. A company can run improvement projects for years without its everyday work becoming reliable.

Single methods fit inside it. Six Sigma, a project method built around measuring and reducing defects, is one approach a program may use, and a kaizen event, a focused week of improvement on one process, is one tool. Both can run while the rest of the operation still depends on firefighting.

Cost cutting is the confusion to rule out first. The open textbook on Treacy and Wiersema’s work says operationally excellent firms focus on cost and efficiency without necessarily being the lowest-cost producer, and calls a fixation on cost cutting and rigid command and control a serious misreading of the idea.⁵

Myth

Operational excellence is a polite name for cost cutting.

Fact

Cost falls as a result of reliable, improving work. A budget cut that leaves the process unchanged can bring the problems, and the cost, back later.

A support team that cuts staff may meet its budget this quarter while queues grow; one that removes the cause of repeat calls may need fewer people and keep the gain. A useful test for any change is whether the work will be more reliable next month, or only cheaper this quarter.

What does an operational excellence manager do?

An operational excellence (OpEx) manager builds a company’s ability to improve its own work: training people in methods, facilitating improvement workshops, measuring progress and coaching managers until they run daily reviews themselves. The Lean Enterprise Institute’s lexicon calls the matching team a lean or kaizen promotion office, a resource team that trains staff, runs kaizen workshops and measures progress.¹²

The role works best in support of line managers. The managers own their processes and their daily reviews; the OpEx manager teaches the method, spots patterns across teams and challenges results that look too good. A typical week might mix visits to team boards, an afternoon helping a supervisor with one stubborn problem and a review of which measures moved. As managers take over the daily reviews, the OpEx team’s work narrows to teaching and checking.

If you are applying for such a role, ask who runs the daily reviews today. If the answer is the OpEx team, the job may be firefighting under a new title.

Signs a company is only using the label

A company is probably using operational excellence as a label when the words appear in strategy decks and job titles but the daily work has not changed, and the program is judged mostly by the money it saves.

A launch event and a new job title are quick to arrange; standards and daily reviews take managers’ time every week, which makes them the easiest part to skip. Each sign below can be checked within a week:

1. Problems get fixed only after a complaint or a failure, the lowest answer on the World Management Survey’s improvement question.¹
2. Measures are tracked ad hoc or reported monthly, and the people doing the work cannot say how yesterday went.¹
3. The program is defined by a headcount or budget target, the cost-cutting reading the textbook calls a misreading.⁵
4. Success is counted in trained staff, certificates or boards installed, with no change in the measures customers feel.
5. Senior leaders rarely visit the work, and improvement is handed to a central team.
6. The same few people still rescue the same processes every month.

A bank back office that renames its savings plan and fills a wall with boards nobody updates already shows two of these signs.

Start with a few measures and a daily review on one process

Begin on one process customers feel, before any program gets a name: two or three measures shown daily where the team can see them, and a ten-minute review that ends with one named person acting on one problem. Daily review meetings and visual displays were among the routines the Indian textile trial helped plants adopt.¹⁰

Order fulfillment, patient check-in or month-end invoicing all work, with measures the team can move within a day, such as orders shipped on time. Keep to two or three, because a review of ten numbers rarely reaches a cause in ten minutes. A fixed time keeps the review alive in busy weeks; the agenda is yesterday’s numbers, the biggest miss, one cause and one owner. A fix that works goes into the standard, or it lasts only as long as someone remembers it. Check the trend after a month before widening the routine.

Your first month on one process

• Pick one process customers feel
• Choose two or three daily measures
• Show them where the team looks each morning
• Run a ten-minute review at a fixed time
• End each review with one owner and one action
• Write each working fix into the standard
• Review the trend after a month

The bottom line

Operational excellence describes work that stays reliable because its system carries it. When the phrase comes up, ask whether it means a strategy choice or a change in how daily work runs, and look for the routines behind it. To start, choose one process, put two or three measures where the team sees them, and review them for ten minutes every day for a month.