More than fifty years ago physicist Edward Lorenz demonstrated something that came to be called the Butterfly Effect. As the illustration goes a butterfly flapping its wings in Japan sets off a chain of events in the atmosphere that can alter the course of the weather on the other side of the planet. (Butterfly Effect- Wikipedia)
It’s an amazing principle of the physical world, and it’s just as true for business. Seemingly small changes can create enormous changes in the performance of your business. And it’s not just serendipity or chance. You can actually apply the principle to produce huge improvements in your business, if you know what changes to make.
That’s the subject of this week’s post—the true story of how one company made a seemingly small change to how it measured its factory employees and turned the company from losses to record profits in a matter of months. It’s a great illustration of how measurements drive behavior and even more so how motivated leader can transform their companies quickly if they have the courage and the conviction to challenge some of their fundamental beliefs. I’ve changed the names and some of the details to conceal the identity of the company, the basic facts, and the results they achieved, are exactly what happened.
Feeling Stuck
Like many companies sometimes find themselves, this business, who I’ll call AirPro because they are in the aerospace industry, was stuck in a bit of a rut. AirPro makes lightweight metal components that go into aircraft. Producing these parts requires many manufacturing steps including many repetitive testing and modification steps. They had been around for many years and had a long and successful history, but they were struggling. Inventories and lead times were high, they spending large amounts of money on overtime and re-work, and were unable to deliver reliably and on-time to their customers.
This poor service to the customers had already resulted in the loss of several important contracts, several others were in jeopardy, and their track record was making it difficult to convince new customers to buy from them. In the previous year they had gone from being narrowly profitable to losing money month after month, consuming most of their available cash to the degree that the company was under real threat.
The company had already endured significant cuts, that had not restored profits and they knew that further cuts would do more damage to their ability to meet customer needs. They needed something to change to reverse the trend, restore customer confidence and enable them to start winning orders again.
Management Model
AirPro, like many companies, was highly focused on the numbers. They had dozens of measurements they used across all areas of the business. One of the key things they used to manage manufacturing performance was something they called “earned standard hours” (ESH). Every department and manufacturing as a whole was managed closely on this metric. ESH was essentially an efficiency measure designed to motivate the 
production of good parts in the greatest number and in the most efficient manner. For every part there was an established time (standard) that it should take to do the work at each step of the process. When parts were produced faster than the standard time, the measure was positive. When it took longer than the standard it was negative.
This measure had been in place for decades. Any time a process was modified or improved the standard was updated, and all standards were reviewed at least once per year. To motivate good quality employees and departments were only given credit for the “good” parts they made. Since in most cases it was only possible to tell that a part was not of the proper quality through testing done in a downstream process, the department got credit for the original work it had done, but would receive zero credit for the re-work of a non-conforming part. The measure was so central to their management model that employee pay was tied to it. Workers would receive “incentive pay” above their hourly wage for producing more than the established standard.
They diligently managed these metrics like hawks and employees typically earned incentives in every paycheck. But try as they might none of their actions were producing any real change in the bottom line, or in their delivery performance.
Recognizing the Opportunity
Sometimes seeing the underlying causes of a situation are like finding a needle in a haystack. There is so much going on and so many variables at work that evaluating the impact of something as simple as a factory performance measure is very difficult to do. And it’s particularly difficult when there are so many other “easy” explanations like the competition, or old equipment, or demanding customers. What made AirPro different than many companies was that they were willing to look past the simple reasons to find the real reasons.
But even so it was hard to establish clear evidence of the impact the ESH measure was having on their results. So to help them my partner created a simple game to test the effects. The game enabled the executive leadership to isolate the impact of their ESH measurement, and of other measures and get a read on how it contributed to performance. Using ESH to make decisions in the game produced results results very similar to what had been happening in the company—shipments did not keep up with orders, and inventory was high and growing, even though ESH was high.
When decisions were aimed at maximizing ESH the parts with the easiest standards to meet were favored over others. This did not coincide with what was needed to marry with other parts, or to fill the customers’ orders. The group agreed to re-play the game using a different set of measurements—they decided they should be based on order due dates primarily. Now parts flowed in the proper sequence to be assembled with the other parts and to fill customer orders. Not surprisingly, the game results improved dramatically—Shipments went up almost 50%, inventory was low and when the appropriate cost and sales figures were calculated, the company in the game went from a loss to a nice profit.
The Butterfly Flaps its Wings
This exercise provided compelling evidence that the current ESH measures were pushing people to make the wrong decisions, but changing a long-standing practice is never an easy thing to do. The rules and measures we use to manage our business have been formed and established over years, with a lot of experience behind them. They are the eyes through which we see our businesses so changing them can be a scary and potentially hazardous thing to do.
Two simple but bold actions broke the logjam. The first was the President saying: “I am prepared to change the measurement tomorrow unless someone can show me why it’s wrong.” This statement had the immediate effect of cracking the frame of the traditional way of doing things. The second action removed the rest of the team’s concern. A small team devised a way for management to monitor and check the effectiveness of the new rules. They could know within a few days if new rules were working, or if there were any negative side-effects resulting. So if they encountered any issues they could make modifications, or in an extreme case go back to ESH if they needed to before anything really got worse.
Isn’t it Obvious?
As with many breakthroughs, they look simple and obvious in hindsight. Coming in after the fact it looks like anyone could have seen it and done it. Shouldn’t AirPro have been able to see that their metric was driving the wrong behaviors? The ESH measure showed that everyone in the factory was busy and the high inventories proved that there was work getting done. And the fact that they were not shipping enough could be seen as an indicator that something was amiss with the priority system.
We can also see in hindsight how not giving ESH credit for re-work would cause those jobs to drop to the bottom of the queue and only get worked when the orders got late enough to get everyone’s attention. The growing inventory and falling shipments could also have pointed them to look at the standards, which everyone in manufacturing knows will never be perfect. People will always do the things that make their measures look best, especially when their paycheck is so directly tied to it. But we all know that these were not the only facts available for AirPro to pay attention to. There were hundreds of other data points, anecdotes, and factors obscuring the picture. Sifting the relevant few from all of the noise is very much like looking for a needle in a haystack.
Today everyone accepts the basic rightness of the theory of Gravity—it’s obvious. But before Newton there were all kinds of explanations for why things fell to earth. AirPro’s real accomplishment was to have the courage to look at their business in a direct and honest way, and then to break free from the inertia of how they had always done things.
Just in case you were wondering, the first month after AirPro replaced ESH with their new measure, shipments started increasing and inventory began falling. Deliveries got to 100% on-time within two months. In addition to boosting the confidence of management for changing long-held methods, the small change in the factory measures created a domino effect. Bottlenecks became obvious starting a whole chain of improvements that resulted in dramatic gains in lead time and shipments. Over the next 12 months AirPro achieved record sales and profits. Their transformation altered the career paths of the executive team. Many of the managers were offered promotions and the President was promoted to CEO of the Corporation.
The lesson of the Butterfly Effect is powerful. Very often changing your results in a major way does not require large investments, or dozens of complex actions. Small changes focused on the key underlying rules and measures that drive decisions and actions can produce big results. What is required is the willingness to look logically and critically at our beliefs and the courage to trust our analysis and act.
I’ll keep sharing stories like these, but now I have a favor to ask you. What stories do you have of how small changes produced great results for your business? Leave a comment and let us know.