The Misuse of Key Performance Indicators (KPIs)

What's the difference between Compliance Excellence and Contextual Excellence? Is one better than the other? Which one does a Deming organization pursue? In this episode, Bill Bellows and host Andrew Stotz talk about the variety of types of excellence, and why they matter.

TRANSCRIPT

0:00:02.7 Andrew Stotz: My name is Andrew Stotz and I'll be your host as we continue our journey into the teachings of Dr. W. Edwards Deming. Today, I'm continuing my discussion with Bill Bellows, who has spent 30 years helping people apply Dr. Deming's ideas to become aware of how their thinking is holding them back from their biggest opportunities. The topic for today is episode 11: In Search of Excellence. Bill, go ahead, take it away.

0:00:28.9 Bill Bellows: All right. So, as I've been doing for the last few episodes, I like to go back to the prior episode. Because I listen to these again and again and again. Oh, there's other things I wanna say. [laughter] Remember the title of the last session, Andrew?

0:00:46.1 AS: Well, that depends. [laughter] The title was, It Depends.

0:00:50.7 BB: Alright. Alright. So you know I'm fond of that phrase. So I wanna... I thought of after, you know, in the last couple weeks is, I took a class in program management at a big university in Greater Los Angeles. I mean, it could have been anywhere, but it was in Los Angeles, and there were 25, 30 people in the room, maybe more, from around the world coming into this university. It was a three day program, you know, like, $1,800. $1800. I had just joined a department called The Program Management Office, and I thought, I should go find out what program management is it all about? I had some ideas, but I thought, "I want to go take a real class on this." The class was presented by an aerospace veteran in project management. He had been involved in major programs with Hughes, installing, you know, working on airports around the world and other DOD stuff.

0:01:48.6 BB: And I mean, he was, he was a very interesting guy. I got there early every day looking, I was hoping there'd be an opportunity I could start a conversation with him, have lunch with him, that never happened. But three days long. And so, on the second day, he threw out a question to the audience, and people are sitting in a... It's kind of an amphitheater, with the rows were kind of curved. So he throws out a question to the audience and the guy in the front row answers, "it depends." [laughter] And the instructor very deliberately walked from the front of the room, a good 15 feet without saying anything, just walked right at that person in the front row, you know, all at the same level, gets right in his face and says the following, Andrew, are you ready?

0:02:47.6 AS: I'm ready.

0:02:48.6 BB: He says, "Are you an attorney?" [laughter] And I thought to myself, "All of that for the answer, "it depends," really?" And so, [laughter] later that afternoon, somebody asked the instructor a question, "Hey, what if you're in a situation where you gotta deal with blah, blah, blah, blah, blah, this, this, this, this, this, how would you handle that?"

0:03:17.3 AS: And for the listeners out there, you know the punchline here, come on, give it to me. What did he say?

0:03:23.5 BB: No, here's what he said. He said, "Well, if it involves this, I would do this. If it involves that, I would do that." And so, what did I say, Andrew?

0:03:42.6 AS: What did you say? What do you mean?

0:03:44.7 BB: I bit my tongue.

0:03:45.9 AS: Oh, you didn't say anything when he said that?

0:03:48.6 BB: Because what he just said was, "it depends."

0:03:50.4 AS: "It depends" in another way.

0:03:52.8 BB: Yeah. He found another way to say "it depends." So it was also...

0:03:56.0 AS: He sounded kind of smart, you know, well, let's just narrow it down to two potential options.

0:04:00.8 BB: "Are you an attorney?" Yeah. But he still... What he was still saying was, it depends on the situation.

0:04:09.3 AS: Yep.

0:04:09.8 BB: And I just thought... I mean... And not that I didn't mind that answer, but I was just dumbstruck as to why he was so emphatic in challenging this answer, "it depends"? And I just thought, again, I never went up and asked, but I just thought, I wasn't sure it was gonna go anywhere. So anyway, so I wanted to throw that out. Going back a couple episodes, I wanna talk about metrics and KPIs and point out that there's nothing wrong, I mean, we're not saying KPIs are bad. What we're talking about is, when KPIs are used as goals and in a way that unnecessarily drives the organization in different directions, but if a KPI is just a metric of how we're doing in sales, that's one thing.

0:05:03.7 BB: But if the metric is, I want sales to be this number, and I go to people in procurement and say, "I want you to cut back on procurement," you know, we can end up with a conflict. You know, I had a woman in class once who worked for a gym, health club. And her job was to sell memberships and get on the phone every day, sell memberships, sell memberships, sell memberships. And she told her boss, she says, "Now, if I do a really good job, lines will form if we don't get more equipment. So, while I'm doing this, shouldn't we be working on that?" And her boss' attitude was, "You keep working on that and don't worry about that." So what she realized, it was just a revolving door of replacing old people with new people. They were just managing the parts in isolation. But another thing I think we had agreement on, you know, also had agreement on KPIs is it's... We're not saying there's anything wrong with metrics, but in organizations where we've worked, we've seen people drive change with, "give everybody a KPI."

0:06:17.5 BB: We could have great ignorance of variation. We have... Leading to dissolution of, just increased separation of organization. What I'm also reminded of is a quote that Dr. Deming used to use of his statistician colleague, Lloyd Nelson, who said, "the most important numbers used to manage an organization are unknown and unknowable." And one example from when I worked for Boeing is a good friend of mine was at the Boeing Leadership Center and there was a big emphasis at that time on what's called the Economic Profit Calculator. Making sure that business decisions close. They were not gonna build the next generation airplane unless they've got all the sales lined up and you have to have closure and closure within some timeframe, and that person came out.

0:07:12.4 BB: That was the big driving change in that era. Well, right after that presentation by somebody senior, the Chief Operating Officer, Harry Stonecipher presented. And what was near and dear to Harry at that point was something he started when McDonald Douglas was separate from Boeing, then Boeing bought McDonald Douglas, and he was really big on an education program that allowed anyone to pursue any degree, all reimbursed. So if he wanted an AS degree, a Master's degree, a law degree, not only were they paying for the degrees, but there were people getting a Bachelor's and then getting a Master's in Science and a MBA, so he just go at it, go at it. And he's very proud of that.

0:08:00.5 BB: So, my friend Tim is listening to all this and he says, "This afternoon, we heard from so and so in finance about Boeing business decisions needing to fit into this Economic Profit Calculator, how does your education reimbursement program fit into that model?" And his answer was, I thought really profound, he said, "there are some things you just do." And to me that fits in with Deming saying, you can't measure the price of education. We brought an instructor in, we had you away for so many hours...

0:08:34.6 AS: You can measure the cost.

0:08:36.1 BB: And so, we can put some numbers on it. But what are the benefits? The benefits show up in the future. So I really admire that Stonecipher's answer was, I think very much in keeping with Deming is, we're gonna spend money on education. So, I just wanna throw that out for in terms of metrics and what not.

0:08:52.9 AS: And I would just throw in my thoughts on KPIs, which has gotten stronger and stronger over the years, and that is that, I really think people should stop KPIs. And the reason why is, because I think they've gotten to the point where it's just so misused and so, people are so reliant on it. Now, I know that that's an extreme view and so... But I say it to also challenge people to think about it, but if you can't stop the KPIs, then I would say the most important thing from my perspective, is make sure that compensation is not linked to the KPIs. Which of course, people will come back and say, that's the whole point of KPIs.

[laughter]

0:09:44.4 BB: Exactly.

0:09:44.5 AS: And if you remove compensation connection to KPI, and instead of that, you use coaching and working with your team, and you have metrics of what you want to achieve as a company, as an organization, as a department, and you look at those metrics... Nothing wrong with that, but it's when you bring in the personal, particularly the personal incentive or the division incentive that can then sub-optimize... Can optimize a part of the organization, either an individual or a department, and therefore, sub-optimize the total.

0:10:22.0 BB: Oh, yeah. If you tie those metrics... Yeah and that becomes the... What makes them sinister, when you provide that incentive that... And I'm sure we've both seen people given incentives and they're not gonna leave, what I tell people is, they're not gonna leave a penny on the table, whether it's get rid of that division, lay off so many people, they are going to achieve that metric, because there's money on the table and in the way of that problem.

0:10:55.2 AS: And for those people who are listening or viewing, who feel like, "My God, what would I do if I don't have KPIs, because that's kind of the way we've been managing?" The first thing is, I would say is that, if you know that... So first, talk to your staff, because once you go out and talk to the people in the company, you realize that almost nobody is in favor of KPIs, because they're being manipulated in many ways and they all see it. But if you know in your heart that it's not the right thing to do, my argument is, don't wait to stop doing the wrong thing until you know what the right thing is. You know? Stop... "I don't wanna stop beating my child, because I don't know the other way to do it." [laughter] No. Stop beating your child today, that would be a first step. Don't worry about what it is you're gonna do next. Anyways, that's enough on KPIs.

0:12:00.4 BB: You've reminded me of a story that's coming to me, but it's not coming in loud and clear, so I made a note, I'll share it next time 'cause you're gonna love it. I wanna give an example of what, of what, of what a narrow focus on KPIs can do. Just a couple of little ones, that are, you just can't make these up. In 1999, while at Rocketdyne, there was a focus on reducing costs. And this is, all organizations have these stories. And this is one I use to talk about in class all the time. So I don't think anyone's gonna be offended. Hopefully they'll laugh more than be offended by it.

0:12:37.9 BB: So there's a big focus across the company of reducing cost. Reducing cost. What do people do in a non-Deming organization? They look at cost in isolation. Where I wanna reduce the cost of this, not look at how it affects the others. And so, at that point of time, again, we're talking over 20 years ago, all the documentation to make every space shuttle main engine was on, was on paper. Every page used to fabricate the engines on paper. And there were page by page instructions of manufacturing to do this, do this, line by line by line, and on every line it might say, torque this bolt to 55 inch pounds, and it was stamped by me, the mechanic, and by you the inspector. Boom, boom, boom.

0:13:28.2 BB: So if NASA ever wants to know, was that bolt torqued on that engine on... And we have all the documentation. Guess how many pages of documentation there are? Nowadays it's likely all electronic, but in that day it was all paper. Guess how many pages of documentation for every single space shuttle main engine of which they're on the order of 18 made? Take a wild guess.

0:13:55.9 AS: Gosh. I'm just thinking thousands.

0:14:00.5 BB: 18,000 pages of documentation. So Andrew, that's like, 60 3-Ring Binders and I mean, 300 pages in a 3-Ring Binder, right? So imagine every engine's got 60 3-Ring Binders. So in 1999, all the pages in those books are on card stock heavy... Card stock paper, heavyweight paper, right? And why is that, Andrew? Because these are a storage document, right? So, I kid you not, one week I'm doing a class, you know talking about paradigms of variation and all the things we've been talking about. And somewhere in the conversation, somebody mentions that the card stock paper was replaced by lighter weight photocopy paper. And then, the person mentioned that, shared that, as a result of that, in the use of these 3-Ring Binders, the pages were falling out.

[laughter]

0:15:05.4 BB: And when I... And then the person went on to say...

0:15:07.1 AS: Oh, that's okay.

0:15:09.3 BB: Oh, no. Hold on, Andrew. So, as a focus on reducing costs, the heavy card stock paper is replaced by a lighter weight paper. The pages are falling out. So when I asked the guy, what are we doing with it? And the answer was, we're putting hole reinforcement circles on the pages to put them back in the binder.

0:15:34.2 AS: Absolutely.

0:15:35.1 BB: Right? And so, for those who don't know, hole reinforcement circles are little circles about the size of a, of a cheerio that get put on either side of the sheet of paper...

0:15:46.9 AS: With adhesive on the back of it.

0:15:48.1 BB: And it's a heavy cloth to keep it from pulling up. So, I mentioned that a couple of days later to some colleagues and they looked at me like I was from Mars. They're like, no, I mean, you've got some great stories, Bill, but they weren't buying the story. So the following week in class, [chuckle] I said, Hey, last week somebody mentioned, anybody know anything about that? And the guy in the front row, not only does he nod and say, yeah, he pulls out of his box a roll... Pulls out of his pocket a roll of like, 300 of these. And I said, so, this is really going on. He says, Bill, I go through a box of these a day.

0:16:29.9 AS: Oh, my God.

0:16:34.5 BB: So when you focus on the cost of the paper and forget that the paper is actually a storage document, not just a sheet of paper, you end up with hole reinforcement circles as a solution. Now...

0:16:46.1 AS: And the cost of the circle, the reinforcement, hole reinforcement adhesives that you put on and the cost of the labor that's spending time doing that by these high value added people.

0:17:04.6 BB: Well, and I also realized, if the space shuttle is on the pad and ready to go, fueled, if you're in that window and something comes up and somebody in NASA calls up Rocketdyne and says, we need to know for the second engine in that vehicle, if this work was done? If this work is done? If you delay the launch, if you're in the window, the vehicle was fueled, it's like a million dollars a day. So imagine going to the binder and the phone call back is, we can't find that sheet of paper. So this is...

0:17:46.8 AS: That was on page 47. I've got 46.

0:17:52.7 BB: We've got 40...

0:17:53.3 AS: And I got 48.

0:17:55.5 BB: So, but I use that. Okay, well, pre-pandemic, I was doing some training in New Zealand at a university. I needed to staple... I needed... [chuckle] I needed to staple these documents together. And so, the instructor who was hosting us, said, "What do you need?" I said, I need staples. So he goes to his office, comes back five minutes later, gives me a couple reams of staples and I go to put them in the stapler. And he says, "You're using these?" I said, "yeah, I'm using them." He said, "wait." He says, "Let me go get the good staples." I said, [chuckle] "what do you mean?" He says, "The university buys us really cheap staples. So all of us in the faculty keep a private stash of good staples. Let me go get the good staples." Right?

0:18:48.8 BB: You can't make up... Right? This is little stuff. All right. So now I wanna get to what Dr. Deming said last time I used a quote from Dr. Deming about it would be important for people to work together. And what I share in some of my seminars is an Aesop fable, from Aesop the Greek fablist. So we're talking like, 500, 600 BC and the particular fable I referenced is the four oxen and the lion. Are you familiar with that one?

0:19:23.7 AS: No.

0:19:25.1 BB: Okay. Well, I came across this, because I was doing some research on the expression "United we stand divided we fall." And I'm thinking united, divided, I'm thinking Abraham Lincoln, Civil War and to come up with, no, that's the punchline for Aesop's Fable about the four oxen and the lion. And the storyline goes that these four oxen would stand looking outward with their tails connected. That's the united we stand, they looked outward and the lion would circle them, but the lion couldn't do very much, because we're protecting one another. And then when the oxen broke rank, the lion jumped in and ate them. So the united we stand divided we fall. So the reason I use that is, I'm not proclaiming that Dr. Deming is the one who figured out the importance of teamwork. [laughter] I think that was figured out a long time ago. I look at what Dr. Deming's work is about - is helping us understand what are the obstacles to what I think we all really want. But I don't think he... So when he references teamwork, that's an old concept. That's why I like to use the Aesop fable, as it goes back a long way.

0:20:41.3 AS: Yeah.

0:20:42.2 BB: All right. But in terms of division, I'm gonna share from Russ Ackoff one of the many things I learned from him and that is that the adjective in front of the word "problem" is divisive. And so, when I worked in Connecticut for the jet engine company, we're making 120 tank engines a month, 1500 horsepower $300,000 each. And at least once a year there'd be an issue. We gotta stop production. Which would lead to the conclusion that it's a design problem in which case manufacturing did what, Andrew?

0:21:24.5 AS: Not sure.

0:21:25.1 BB: Breathed a huge sigh of relief.

0:21:26.7 AS: Not our problem.

0:21:28.4 BB: Or if it's not a design problem, it could be a manufacturing problem, in which case engineering said... And the engineering people felt slighted, because the president of the company was a manufacturing person. And so, what I saw was, yeah, as soon as you define the problem from that vantage point, then it's stuck on someone. And everybody else just says, whew! Thankful it wasn't us this time. So, I wanna share from Russ, what if we aren't so divisive?

0:22:02.4 BB: So Russ has a really neat story going back to, could be the '60s and you'll know by the punchline the timeframe. So at that point in time he was invited to GE's Appliance Center in Kentucky and he brought a graduate student with him. And he said, in the room, in the center of the room of this conference table, they're discussing this issue they're having. And around the perimeter of the room are all the major appliances that GE is selling at the time from refrigerators, freezers, stoves, washing machines, dryers, they're around the perimeter. And the issue they're facing is, what is labeled a "forecasting problem." And store owners are complaining that when the people are coming in to buy the appliances for the kitchen, they need to remodel the kitchen, they need a new refrigerator, they need a new washing machine, I mean a dishwasher and a stove.

0:22:54.2 BB: They need those three. And the forecasting issue is they come in and we only have two of the three, or we don't have the right... We don't have the matching colors, the matching styles. And so, that's why we're losing sales to the others. And we needed a better forecast. And in addition to having the right colors and the right model, another feature in that timeframe was the refrigerator door had to either open from the left or open from the right to match the configuration of the kitchen. So you may have the right... All three are right, but now you've got a left-handed door and the refrigerator needs a right-handed door. Oh. All right. So the graduate student upon hearing this uses a Swiss Army knife, Russ said, to take a door off of the refrigerator and said, have you ever thought about a reversible door design?

0:23:49.1 BB: And so, the reason I share that story for our audience is, that's what happens when you involve design in a solution to a forecasting problem. You get their inputs. And so, anything short of that, when we, when we focus on a manufacturing problem, only invite manufacturing, not invite others and as is prone in a non-Deming organization you end up with solutions that don't involve the others. And so, I just wanna throw that out that these are... The everyday things we do in organizations to divide. Alright. So now let's talk about the featured movie tonight.

0:24:27.3 AS: Yes.

0:24:27.8 BB: In Search of Excellence inspired by the book by Tom Peters and Robert Waterman. Correct?

0:24:35.3 AS: Yes.

0:24:35.9 BB: Roughly '82, '83 timeframe. And so, Dr. Deming's work has been known for a couple years and Tom Peters and Waterman wrote a book talking about... There's US companies doing excellent work, so let's go look at them. So at Dr. Deming's last seminar there were three assistants helping him. He was very frail, he was in a wheelchair, ended up dying 10 days after the seminar ended. And I think I mentioned sitting next to me for all four days was a rabbi praying for him. So, Dr. Deming is very frail in the wheelchair the entire time, when he would get fatigued, he'd be wheeled off the stage. One of these three assistants would come up and pick up the pace. Couple hours later Dr. Deming comes up. And so, during one of the breaks I went up and introduced myself and, to them. And one of them told me that...

0:25:30.0 BB: You know, he traveled with Dr. Deming. He was one of what's called a Deming Scholar. So at that point of time, there was a cadre of people that would travel with Dr. Deming if he was doing a seminar or he's at GE headquarters, wherever he was that week, this cadre came with him. So he said, somebody once in one of these sessions, said to Dr. Deming, "what's the difference between Jerry Falwell and Tom Peters?" And he says, Dr. Deming says, "who's... Well, who's Jerry Falwell?" And he says, "oh, he's a Baptist minister." He says, oh, he says, so.

0:26:02.8 AS: A very famous one at the time.

0:26:05.0 BB: Very famous Baptist minister. And he says, "so what's the difference?" Dr. Deming says, so what's the difference? He says, "Jerry Falwell has a message." And so in that timeframe, I remember... I used to remember... And you likely watched these as well. So Tom Peters would be working on his next book and whatever the theme of the book was, he's doing research. And I give him credit. I mean, he's a Stanford Business School graduate. He's doing all the research, incredible at marketing. So he picks a topic, does his research, writes the book, goes on PBS to do this presentation with a thousand people in the room. And he's using real life people and companies to tell this story one at a time, one at a time, one at a time. So I thought, well, what if Tom Peters was to write a book about how to live to be a 100? Well, what do you do, Andrew? You've got to go find people who are a 100, right?

0:27:05.3 AS: Yeah.

0:27:06.2 BB: You can go find them, right?

0:27:07.1 AS: Yep.

0:27:07.8 BB: And so, I used to imagine that if Tom Peters is, you know, writing a book about how to live to be a 100, he's gonna go... The recipe is find the people, find the successful companies, go research them, a chapter on each one of them. Each of them comes up and presents. And so, there we are on PBS and the first guests that come out are a 101-year-old gentleman. And he comes out and he's chain smoking and he explains that, how does he live to be a 100? He says, well, "you...smoking is good, cigars sometimes, shots of Old Granddad and that's how you live to be a 100." And then next we have the sisters, live together, twin sisters, never married, lived together their entire lives, don't drink a thing, teetotalers, and that, you know, vegetarians. And so, you say, oh, so that's how you live to be a 100, Andrew, you drink, you drink tea, no, you stay away from alcohol, stay away from red meat.

0:28:14.6 BB: Next one comes out, right? And the point is that all these companies are different and you're left to figure out which one to think. And whereas what Dr. Deming's talking about is a theory by which to understand organizations that you could take to your organization and figure out how to live to be a hundred, not just what we see otherwise. So anyway, I was aware of all that, studied all that. I wasn't aware at the time that's what was going on, but as I started to research this Peter's and... Why Dr. Deming thought of him that way. And so, Rocketdyne was sold by Pratt and Whitney, sold to United Technologies after Boeing, and they had a big Lean Six Sigma program, but they didn't call it Lean Six Sigma.

0:29:02.7 BB: And the Rocketdyne people are asking, why did you call it Lean Six Sigma? He says, well, it is Lean Six Sigma, but GE calls their program Lean Six Sigma, and we're not gonna use the same name as those guys. Those are the light bulb people. So we've got our own name. Well, what's your name? Well, we call it ACE. What is ACE? Achieving Competitive Excellence. But it's really Lean Six Sigma. So I spent a few years trying to wonder, what does it really mean? And I'm and I'm embarrassed that it took me as long as it did, but it dawned on me what it really means is achieving Compliance Excellence.

0:29:42.9 BB: And it was all about, does this meet requirements? And so that's what I referred to early on as question number one. Does this characteristic, have you passed... You know, have you met all of the requirements? And that's all it was, it was meeting requirements, meeting requirements, meeting requirements. And then, and what it reminds me of is, I was doing a seminar in England once for a one-on-one, went over for three days through a translator, and the audience was a physician from Kazakhstan who was anxious to learn as much as he could about Dr. Deming's work and that led him to England. And through some fortunate situation, I had a chance to meet with him one-on-one and went through and explained to him, Me and We organizations, Red Pen and Blue Pen companies, all that, all through a translator. So I had asked a question in English, the translator would translate, boom.

0:30:36.5 BB: So the question I asked him was, that I wanted to share is, I said to Ivan, I said, "what's the fastest way for a Red Pen company to become a Blue Pen company? What's the fastest way?" So that gets translated into Russian. Then it comes back to me and he says, "what?" I said, "spray paint." [laughter] And to me, that's the epitome of Compliance Excellence where we're... You get a really light surface texture, where it's looking good, but it misses the deep sense of the theory of Dr. Deming's work. But I'm not saying Compliance Excellence is bad. And so, when I wrote an article about this, and if any of the listeners want to contact me on LinkedIn, I can send them an article I wrote about it. And so, 'cause when you go to write about something, now you start to think deeply about this, does this make sense as opposed to just having a conversation? And it dawned on me that Compliance Excellence is not a bad thing.

0:31:39.3 BB: And the example I want to use here is, I was listening to two friends, husband and wife who spent a whole year serving society. They were compelled, had incredible military careers, and they decided we wanna pay back society. So the plan was that the husband, Doug would ride his bicycle every day through every state in the United States, including Alaska and Hawaii over the course of one year. So they started upstate New York, crisscrossing around the country. So he was on his bike every day riding, raising awareness for veterans' issues. 'Cause for those who don't know, there's... The the suicide rate of veterans is enormous. And so, they're looking... They're out there trying to help veterans. They were compelled to do that. And Doug's wife Deb, rode the motorhome, either ahead or behind, hooking up with local radio stations, trying to get PR.

0:32:38.8 BB: Then Doug would show up and he says one day they're riding through the Rockies, having dinner... And they're having dinner that night. But all day long, Doug is going up these hills, down these hills, up these hills. And so at dinner, Doug says to Deb, he says, I mean, "how'd you like that hill?" [laughter] Deb says, "what hill?" [laughter] So to Doug, every mile is not the same. [laughter] Right? So it's 18,066 miles. Doug felt the difference in every one of those miles, more so than Deb did. So if somebody says, how far was that route, Doug? For Doug to say 18,066 miles, 67, that's ups and downs, he felt every one of them. For Deb, it was a little bit... They were more of the same. So I'm not saying there's anything wrong with answering the question 18,067, but to me that's a compliant... That's looking at every second being the same, every hour being the same, every widget being the same, not understanding the differences or how they're being used.

0:33:49.1 BB: So now I wanna talk about, instead of Compliance Excellence, again, I'm not saying Compliance Excellence is bad. What I would say is that non-Deming organizations thrive on Compliance Excellence in this sense of interchangeability. Everything is the same, looking at things in isolation. So then I started thinking, well, if that's what they do, what is it that that Deming organizations do? And that's what I would call Contextual Excellence. There's an understanding of context, understanding of the context of the system. Tom Johnson, who has written about, Management by Means, which I wanna look at in a later episode, when Tom was doing research, this is around the time I met him, 1997, '98 timeframe. He was, he was visiting Toyota Plants, definitely in the United States. I'm not sure how many overseas, but he is taking copious notes, going behind the scenes. So this was before the world was all over Toyota.

0:34:47.3 BB: So Tom had free access. He said eventually they start charging for all this stuff. But Tom was there way ahead of the crowd. And he said one day he is with his notebook and he is walking around, he is looking at the stamping presses. But they're notorious for stamping out one part at a time. One single minute exchange of dyes. So they don't make a thousand parts and then figure out how to use them. They figured out how to change the dyes quickly. So Tom said, he asked the guy, "how long does it take to change this dye?" And the guy says something like, 28 minutes. And so Tom writes down 28 minutes and later the guy came back to Tom. He says, "just so you understand" he says "28 minutes is not world class, but this does not require world class."

0:35:32.3 BB: And so this is when I was explaining Contextual Excellence to Tom. And he says, is that what you're talking about? I said, that's exactly what I would expect to see within Toyota, that things are... They fit the situation. So it's not speed for the sake of speed, it's speed that fits the context of the situation, which is also like saying, have card stock paper where it makes sense. Have the appropriate staples where it makes sense. And so, when I talk about "in search of excellence," with my classes or in presentations, what I'm trying to get across is, there's a place for Contextual Excellence and there's a place for Compliance Excellence. But I think that difference is far better understood in a Deming organization that has a great understanding of systems and connectedness and synchronicity and teamwork, and lacking that non-Deming organizations, I think unknowingly default to Compliance Excellence, driving things to zero, thinking you could have zero waste in these things.

0:36:39.9 BB: And then you end up with cheap staples, lightweight paper, and you end up paying for it somewhere else in the system. So I just wanted to point out that there's... I'm not saying one is better than the other. What I'm saying is, I believe a Deming organization would have a profound appreciation of when to use each. And as simple as, if you were to say to me, Bill, how far is it to the nearest airport? I could say, it depends Andrew, what are you... How are you getting to the airport? You say, I'm riding my bike. I said, "okay." Right? And again, not that we're always gonna say it depends, but that's what I think that appreciation has. Let me just stop there and...

0:37:19.6 AS: Yeah.

0:37:20.2 BB: See where you are.

0:37:21.6 AS: So, I have two little stories that I wanna share in relation to this. One of them is about my uncle Ham. Hamilton.

0:37:28.4 BB: Yes.

[laughter]

0:37:29.8 AS: And then the other one is about my own business, Coffee Works. And when we set up our factory 28 years ago, my business partner Dale, was absolutely passionate about coffee. He roasted every bean for our first 10 years. And he sold and he did the accounting and he did everything basically, until eventually he trained staff. And some of those staff still, they've been with us for years, for decades, and they take care of the roasting now. But what Dale really understood was what he called, "in the cup quality." The idea that when... When it's in the cup, that's about to touch the customer's lips, that's the quality that matters. Nothing else matters.

0:38:15.1 AS: If you don't get that right then, you know, it doesn't matter how much you've documented or did whatever you've done in the past, in the temperature of the water, in the grind, you know, in all of these different things. So he was really all about excellence, and we didn't get... We never got complaints. Maybe we got an occasional one, but it wasn't very common. Anyways, we got a big, big multinational company came to us and said, we want you to bid along with some other coffee companies for our business, and we bid for the business. And they said, "We're picking you. And now we're gonna go out to your factory and we're gonna inspect your factory. And if you get a score in our quality audit below 70, you're basically in trouble, [laughter] already, and you're gonna have six weeks to fix it or else you're fired."

0:39:05.9 AS: And this was a huge amount of volume and a prestigious company for us. So we pulled everything together to get ready for their audit. And they came and they gave us their score and we felt like we were pretty damn good. And they said, 65. [laughter] And you know, what we realized to them, quality was about paperwork and quality was about, you know, compliance to that paperwork. And so, we had to do that, because that's what quality was to them. We'd never done anything like that. You know, now, 15, 20 years later, we still supply that same customer and they still do their annual audits and our scores are much... They're in the 90s, which puts us in like, world class. But the point is, we learned a lesson, you know, the difference between contextual quality or let's say, intrinsic quality that Dale was working on versus this kind of, what did you call it? Compliance Quality.

0:40:08.5 BB: Yes.

0:40:09.9 AS: So that's my first story. The second one is about my uncle in Germany where he was in charge of the, of the logistics of a base of a US military base. And the commanding general came to see, and they had cleaned up everything. And they got to the end of the whole thing, and they kind of dumped out to the parking lot where there's, you know, 700 or 500 vehicles lined up in different ways and whatever, all kinds of different sizes of vehicles. And Uncle Ham said, "Sir, so how did you like the tour of the facility and all that?" And he says, "of the base?" And he said, "Ham, everything was great except one thing."

0:40:48.4 AS: And my uncle's like, "Okay, what is that, sir?" And he said... And he looked at the vehicles, a long line of vehicles parked side by side. And he asked him, he said, "Next time I come here... " Now remember, these vehicles are all different lengths. "Next time I come here, I want these vehicles all lined up. It's a mess the way you've got it done." Yeah. And so, my uncle said, "Yes, sir!" And he said, "Before you leave, sir, could you walk to the back of the vehicles for a moment with me?" "Yes, yes, I will." And he said, "Sir, would you like them lined up in the back or in the front?" And they had lined them up in the back, which meant their noses were in different lengths. And the point is, is that you can't have it all, right? Everything's a tradeoff. You want it this way. There's a compromise here, there's a challenge there and all that. And that's a lesson I learned from Uncle Ham.

0:41:46.1 BB: Well, and then he, I'm sure he learned it from that point on is, you know, when, when he is asked to line them up and make them more uniform, the question is, help me understand what that means.

[laughter]

0:42:00.3 AS: And the answer's gonna be, it depends. 'Cause this general likes them lined up in the back and this general likes them lined up in the front. We're gonna need to wrap up. So how would you close out this episode?

0:42:17.0 BB: The main thing I want to get across saying is that, first of all, Contextual Excellence is the bedrock of investment thinking. To look, when you begin to look at things as a system and to understand that every mile is not the same or do I need to... Does that matter to me? But to me, instead of everything could be improved, you know, we focus on where are the most red beads, get all the red beads to zero and then go across the organization. And what is that? That's managing actions. We talked about that months ago. And to me that's Compliance Excellence. It's looking at the parts in isolation. But to me, what Contextual Excellence is about is the better we understand, the greater how things fit together.

0:43:10.5 BB: And there, the challenge is that everything we work on is part of a bigger system, which is part of a, then again, bigger system, which is part of, then again, bigger system. So we're not proposing that you're going to infinity, you know, that there's this big picture of you, whatever that means. It's, it's, and I like it... You know, people talk about, well, you know, Andrew's a systems... You and I, Andrew are systems thinkers, as if the others aren't. What does that mean? That means that we think of the big picture. There's no such thing as a big picture. So there, what we're talking about is Contextual Excellence, is trying to gather as much context for the system as it makes sense with appreciation that you might still be missing something.

0:44:00.3 BB: And that's where learning comes in. But that understanding is part of, is fundamental to investment thinking. You know, is the education system paying off? How would you know? Where are we gonna see that benefit? What is your theory for that? So I just wanna point out is, I'm not trying to condemn Compliance Excellence. I think Deming organizations are gonna have a place for that. Just like there's a place for, you know, does it meet requirements? Yes or no? It's just becoming more mindful of these choices is, is what I'm suggesting or proposing.

0:44:31.1 AS: Yes. Well, Bill, on behalf of everyone at the Deming Institute, I want to thank you again for this discussion. For listeners, remember to go to deming.org to continue your journey. There's so much there for further learning. And if you wanna keep in touch with Bill, just find him on LinkedIn. He's right there. This is your host, Andrew Stotz, and I'm gonna leave you with one of my favorite quotes from Dr. Deming. "People are entitled to joy in work."