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What Is Operational Excellence?

Operational Excellence is the systematic pursuit of enhanced performance, efficiency, and quality across all organizational processes. It transcends mere cost-cutting—it's about fostering a culture of continuous improvement and empowering teams to drive innovation. Organizations must align their goals with operational metrics, ensuring every action contributes to strategic objectives.

In "The Discipline of Market Leaders," Michael Treacy and Fred Wiersema describe three distinct value propositions an organization can choose to compete in their market or industry:

1. Operational Excellence,
2. Product Leadership, and
3. Customer Intimacy.

The core of the book is based on five years of research by Treacy and Wiersema into a number of blue chip companies, including Wal-Mart, Dell, Southwest Airlines, Home Depot, Intel, and Sony. Market leaders choose to excel in delivering extraordinary levels of one of these three value propositions, while maintaining reasonable standards in the other disciplines. So, what exactly is Operational Excellence?

Operational Excellence is a well established management philosophy. It is a philosophy of leadership, teamwork, and problem solving, resulting in continuous improvement throughout the organization by focusing on the needs of the customer, empowering employees, and optimizing existing activities in the process.

There are many approaches, frameworks, and models that have been presented under the term Operational Excellence. It is also closely related to other continuous improvement methodologies, such as Lean Manufacturing and Six Sigma.

See our list of the top 100 Operational Excellence frameworks and OpEx best practices.

Operational Excellence Strategy & Framework

An effective and robust Operational Excellence Framework is founded upon 4 core building blocks:

• Strategy Deployment,
• Performance Management,
• Process Excellence, and
• High Performance Work Teams.

Thus, to formulate a Operational Excellence Strategy that will achieve Operational Excellence requires the successful implementation of an integrated Business Execution System that effectively and seamlessly integrates the above 4 building blocks.

Let's delve briefly into each of these components.

For a deeper discussion on the 4 OpEx building blocks, download a free copy of the 48-slide Introduction to Operational Excellence presentation and consult the recommended training guides and documents below. Also, watch the video above for a glimpse of Flevy's breadth of OpEx and Lean Six Sigma best practice materials.

Strategy Deployment

Strategy or Policy Deployment is the process that aligns and links business strategy and execution. The (Hoshin) Strategy Deployment Process follows a 6 phase approach:

• Phase 1: Organize the process.
• Phase 2: Conduct current state analysis.
• Phase 3: Define strategic vision elements.
• Phase 4: Develop strategic breakthrough objectives.
• Phase 5: Determine strategic initiatives and tactics.
• Phase 6: Implement strategy and review.

There are many tools and frameworks we can leverage to assist in the Strategy Deployment process, such as Strategy Maps, Strategic Grids, and Hoshin X-Matrix.

Performance Management

Performance Management is the process that translates strategic initiatives into measurable objectives and goals. A powerful tool for Performance Management used in Operational Excellence is the Balanced Scorecard (BSC) framework, developed by Dr. Robert Kaplan and Dr. David Norton. BSC is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals.

There are numerous benefits to developing and deploying Balanced Scorecards in an organization. These benefits include:

• Help the management team focus on the execution of their business strategy.
• Focus and align an organization towards common goals and objectives.
• Enable an organization to understand the relationship between measures and performance.
• Improve communication of organizational priorities across an organization.
• Help employees understand and focus on organizational priorities and realize relevant results.
• Reduce the number of metrics to the few vital key performance indicators.
• Strengthen and formalize the project selection process to focus on key capabilities and enablers.

Process Excellence

Well designed, efficient, and effective Management, Value Chain, and Support Processes are necessary to deliver world-class results. On a high level, to attain Process Excellence, follow this 5-phase approach:

• Phase 1: Select the right projects. Clarify big picture using strategic and operating plan. Prioritize projects based on impact, value, resources, timing. Ensure the projects you select have leadership buy-in, etc.

• Phase 2: Select and train the right people. Ensure the right leadership and ownership. Select the right team leader and team. Develop a training plan, etc.

• Phase 3: Develop and implement improvement plans. Utilize the right improvement methodology for the right project.

• Phase 4: Manage for excellence in execution. Stay focused. Frequently review progress. Remove barriers, check real business impact, continuously communicate progress, etc.

• Phase 5: Sustain the gains. Implement effective control plans. Conduct regular training focused on the process. Review the system effectiveness at least quarterly, etc.

There are numerous frameworks and tools for achieving Process Excellence, including a full suite of Lean Six Sigma methodology tools. Examples include BPI (Business Process Improvement) 7, 8D (8 Disciplines) Problem Solving, DMAIC (Define-Measure-Analyze-Improve-Control), and so forth.

High Performance Work Teams

Operational Excellence can be achieved and sustained with the right attitude, the right mindset, and the right competencies. In the "Empowerment Continuum," the high performance team has the highest level of empowerment. This requires the team to have sufficiency across the areas of authority, resources, information, accountability.

While an organization transitions from a more traditional top-down organization to an organization built around high performance work teams, the role of a supervisor or manager changes to the role of a leader and coach, with six distinctive capabilities: living example, coach, barrier buster, result catalyst, facilitator, and business analyzer.

Improve Operational Excellence

The foundational Operational Excellence Strategy focuses on the aforementioned 4 building blocks. To further improve Operational Excellence, there are additional building blocks we can integrate into our Operational Excellence Strategy. These include:

• Digital Transformation: Embrace digital technologies and automation to streamline processes, increase efficiency, and reduce costs. There are numerous emerging technology trends that drive Digital Transformation. Notable ones include Robotic Process Automation (RPA), Artificial Intelligence (namely Machine Learning), Mobile, Internet of Things (IoT), Cybersecurity, Big Data & Analytics, Cloud, Social Media, Blockchain, and so forth. The applicability of technology is largely dependent on the industry and organization.

• Lean Management & Enterprise: Incorporate Lean Management, Lean Enterprise, and Lean Six Sigma methodologies to drive continuous improvement in operational business processes. This approach focuses on eliminating waste, reducing variation, and improving overall efficiency—thereby not only driving Process Excellence, but also driving Customer Satisfaction.

• Supply Chain Analysis: Evaluate and optimize the entire supply chain to enhance responsiveness, reduce lead times, minimize costs, build resiliency, and mitigate risks. This can involve implementing advanced inventory management systems, optimizing logistics networks, leveraging data analytics for demand forecasting, and fostering collaboration with key suppliers and partners.

• Customer-centric Design (CCD): Shift the focus towards customer-centric operations by gaining a deep understanding of customer needs, preferences, and pain points. Use this insight to redesign processes and develop innovative solutions that better meet customer expectations. Regularly collect feedback, conduct customer surveys, and leverage data analytics to continuously improve Customer Experiences.

• Talent Management: Invest in Talent Management and Talent Development Programs to empower employees and build a culture of continuous learning and improvement. Offer training and development opportunities, establish mentoring programs, and encourage cross-functional collaboration. Engaged and skilled employees are more likely to contribute innovative ideas and drive Operational Excellence.

• Risk Management: Integrate Risk Management best practices into operational processes to proactively identify and mitigate potential risks. Implement robust risk assessment frameworks, establish contingency plans, and regularly monitor and evaluate risks. By effectively managing risks, your client can ensure Business Continuity and minimize Disruptions.

• Agile Methodologies: Adopt Agile methodologies, such as Agile or Scrum, to increase flexibility, responsiveness, and adaptability in project execution and product development. These approaches enable faster decision making, iterative development, and close collaboration between teams, resulting in improved operational efficiency and accelerated time-to-market.

The applicability and priority of these secondary building blocks to further improve Operational Excellence will vary depending on your organization's industry, specific business challenges, and goals.

Why Implement Operational Excellence

The pursuit of Operational Excellence generates numerous business benefits. Here are several of the most impactful ways Operational Excellence can drive efficiencies, savings, and other benefits to your organization:

• Simplifies Business Processes – OpEx makes jobs easier and more fulfilling for employees, which means higher employee satisfaction and lower employee turnover.

• Improves the Quality of Products – OpEx helps to better define, simplify, standardize, and control the processes involved in Product Design, Development, and Manufacturing.

• Increases Throughput – OpEx helps to improve productivity, which in turn improves deliveries and can lead to increased capacity and sales.

• Permits Smaller Lots – OpEx helps to reduce inventory waste, quality loss, and production delays.

• Increases the Competitiveness of Organizations – OpEx helps to reduce wastes, lead time, total cost, and resources usage. These savings can be passed on to customers, making your offering more competitive.

• Saves Jobs – OpEx helps to reduce costs and delivery lead times, which benefits the company and customers. Non-deployment of these tools and techniques potentially make companies non-competitive and this could lead to loss of work to offshore companies.

Adapting to the Digital Transformation Era

In recent years, Digital Transformation has emerged as a critical factor in achieving Operational Excellence. This transformation involves the integration of digital technology into all areas of a business, fundamentally changing how organizations operate and deliver value to customers. As businesses navigate the complexities of digitalization, the challenge lies not only in adopting new technologies but also in aligning them with business operations to enhance efficiency and competitiveness.

A significant concern for executives is the pace at which digital technologies evolve and the pressure it puts on organizations to keep up. According to McKinsey, companies that successfully implement digital strategies can expect to see a 45% growth in revenue growth. However, the journey towards digital transformation is fraught with challenges, including the need for substantial investment, the risk of disrupting existing business processes, and the difficulty of driving organizational change.

To overcome these challenges, executives should focus on developing a clear digital strategy that aligns with their Operational Excellence goals. This involves not only investing in the right technologies but also fostering a culture of innovation and agility that can adapt to rapid technological changes. Additionally, leveraging data analytics to gain insights into operational inefficiencies and customer needs can guide more informed decisions, ultimately driving operational improvements and competitive advantage.

Embracing Sustainability in Operations

Sustainability has become a cornerstone of Operational Excellence, with an increasing number of organizations recognizing the importance of integrating environmental, social, and governance (ESG) principles into their operations. This shift is driven by growing regulatory pressures, changing consumer preferences, and the recognition that sustainable practices can lead to long-term financial benefits. According to a recent report by Accenture, 62% of executives believe that a sustainable strategy is necessary to be competitive.

One of the main challenges in embracing sustainability is the initial cost and effort required to redesign processes and supply chains to be more environmentally friendly and socially responsible. This includes investing in renewable energy sources, reducing waste, and ensuring fair labor practices. Moreover, measuring the impact of these initiatives and communicating them effectively to stakeholders can be complex.

To address these challenges, executives should prioritize sustainability as a key component of their Operational Excellence strategy. This involves setting clear, measurable sustainability goals and integrating them into the overall business strategy. Additionally, leveraging technologies such as blockchain for supply chain transparency or AI for energy efficiency can help organizations achieve their sustainability objectives more effectively. By doing so, companies not only contribute to a more sustainable future but also enhance their brand reputation and customer loyalty.

Integrating Advanced Analytics for Decision Making

The role of advanced analytics in achieving Operational Excellence cannot be overstated. With the advent of big data, organizations now have access to vast amounts of information that can provide valuable insights into operations, customer behavior, and market trends. However, the challenge lies in effectively collecting, analyzing, and leveraging this data to make informed decisions and drive operational improvements.

According to a study by Bain & Company, companies that use analytics effectively are twice as likely to be in the top quartile of financial performance within their industries. Despite this potential, many organizations struggle with data silos, lack of analytical talent, and the complexity of integrating analytics into decision-making processes.

To harness the power of advanced analytics, executives should invest in building a robust data infrastructure and analytics capabilities. This includes adopting data management best practices, training employees on data literacy, and implementing analytical tools that can provide actionable insights. Furthermore, fostering a data-driven culture where decisions are based on data rather than intuition can significantly enhance operational efficiency and strategic planning. By doing so, organizations can not only improve their current operations but also anticipate future trends and adapt more quickly to changing market conditions.