For those who missed it, you will find my autumn conference series key note speech very insightful and useful background for this post. Kanban and Evolutionary Management - Lessons we can learn from Bruce Lee's journey in martial arts (video from Lean Kanban Central Europe, Hamburg, November 2013).
Every business or every unit of a business should know and understand its purpose. Sometimes businesses have lost sight of this and there is scope for a workshop exercise amongst senior leaders and business owners to define that purpose. What exactly are they in business to do? And it isn't simply to make money. If they simply wanted to make money they'd be investors and not business owners. They would spend their time managing investment portfolios and not leading a small tribe of believers who want to make something or serve someone. So why does the firm or business unit exist? If we know that we can start to explore what represents "fitness for purpose."
Fitness for Purpose - Purpose & Fitness
Fitness and Purpose are not the same thing! A business can have a purpose without truly understanding what makes it fit for that purpose. Fitness is always defined externally. It is customers and other stakeholders such as governments or regulatory authorities that define what fitness means. Imagine that we own a chain of premium espresso coffee shops. Our purpose may be defined as "democratizing access to premium espresso drinks." We adopted this purpose because we are passionate about coffee and because we believe that others love coffee too. If we can make good coffee easier to access then people will prefer it, even if it is more expensive, than the cheap instant coffee from the vending machine in the their office. Our concept it to serve espresso fast food style with self-service counters, fast service, take-out cups and locations that are convenient for people to buy a cup on their way into their office or close enough that people can pop out and buy a cup on a break. We might even consider that office workers might like to use our cafe as an additional meeting room, so we want convenience, proximity, great coffee and space for small groups to sit and chat and conduct short meetings. As we explore what it means to deliver on our purpose, we start to discover what fitness for purpose means. We discover the criteria under which our customers select our service.
Fitness criteria are not universal. While some criteria will be universally shared, the difference in what people want and expect allow us to define market niches and understand different business risks.
Making sense of the market
I've come to prefer a narrative style to make sense of a complex market. So we tell stories about our customers. We start to see patterns in the stories and we can start to cluster stories together where we feel there is a similarity, affinity or empathy between them. As clusters emerge, we can give the cluster a name. Each cluster represents a market segment. We might then define a persona for each segment. These personas will be used in many more activities in our business to design products and services for that niche.
Understanding Fitness for Purpose by Market Segment
From telling our stories, we may have discovered that we have a segment we hadn't anticipated: the unemployed; under-employed; self-employed; and entrepreneurial folks who frequent our store. These people are either running or hoping to run a business over the Internent from our shop front. They come in, get comfortably seated, buy a large long drink, and stay for hours. They don't care about proximity. They might enjoy a long walk to get here. They are after all planning to stay for hours. They don't care much about queuing time, so long as they can get situated and comfortable. For this customer, WiFi is essential. They also like comfortable chairs with tables at which they can work. They want the atmosphere to be busy without being too noisy. They want nice music playing. They want a little hustle and bustle in the distance. Perhaps they want a fire place? They want a range of coffee drinks with a choice of types of milk, and flavored syrups, and they want something to eat too. They may want several drinks over several hours, so not everything should have caffeine in it. Some non-caffeinated drinks would be nice too. They value the quality and taste of the coffee we offer. If that isn't good enough they will select another store. They also value accuracy of order. If they ask for a tall, skinny latte, they don't want a vanilla soy latte by accident. They don't want coffee grinds in their drink. They want the drink they asked for served with good quality. Lead time isn't so important to them as they aren't in a hurry but accuracy and quality is important. We must not lose their order or make a mistake with it.
Imagine now that you can get inside the head of a persona. Ask yourself what would you value? What would make you choose this product or service? What would make you come back again? What would encourage you to recommend it to others? These are your fitness criteria and it is these criteria by which the business should be measuring the effectiveness of its service delivery.
Different sources of demand. Different classes of service
My local Starbucks in Sequim, WA does most of its business from drive-thru customers. Inside the store, they have a visual management system running software that displays the number of cars queuing, as a series of car graphics. For each car in the queue, it shows the waiting time until their order was taken, and the time from order placement until delivery of drinks through the service delivery window. There is evidently some understanding of customer tolerance for queuing and a service delivery expectation. As the cars in the queue age, their color on the screen changes from green, to yellow, to orange, to red. As everyone in the store can see this screen, the more red cars queuing, the more staff attention goes to servicing drive-thru orders. This is great for drive-thru customers. However, walk-in customers suffer as a result. No one is tracking the queuing time prior to order for walk-in customers, and there doesn't appear to be any quantitative measurement for lead time from order to counter delivery of drinks for walk-in customers. As a result of the visual management system, my local Starbucks is providing two different classes of service to drive-thru versus walk-in customers.
It is natural that different classes of service will exist for different market segments. Different segments represent customers who value different things, and some will be more profitable than others. There are different business risks associated with different segments. Consider a local gym that offers monthly or annual subscriptions. It is known that customers who pay monthly, tend to work out more often, and also tend to stick with the gym for longer. Monthly paying customers use the gym more often because they are reminded that they are paying for it regularly, and as a result they perceive more value. As a consequence of seeing more value, they continue to work out and remain more loyal. Annual paying customers tend to work out less, as they are not reminded of the cost so often. As a result, when their annual renewal comes around, they are less likely to renew. The annual fee is high and they don't perceive a value for it.
Reading this you might think that gym owners would only want monthly subscribers. However, this isn't the case. They actually want a mix of monthly and annual subscribers. If everyone was a monthly subscriber, the gym would be very busy. Too busy perhaps. Some customers would perceive it as too busy. They would be unhappy queuing to use equipment, fighting for locker room space, queuing for the showers and so forth. If the gym is too busy, it isn't fit for purpose. If we have only annual paying customers the gym will not be busy and the experience will be better. However, annual paying customers are likely to churn off our service and we will have a high "cost of acquisition" to gain replacement customers. The goal in managing the risk in our business is to achieve a balance of these two customer types. A balance of risk. This way we can satisfy our monthly paying customers, while gaining extra revenue from those who pay annually. Meanwhile, we can run a limited amount of marketing and sales to replace the annual customers who churn off after only one year.
A class of service is a set of rules (or policies) for how something or someone should be treated. It is natural to define different classes of service for different segments or customer types. We can affect the ratio of one class to another by changing the rules. For example, if we want more monthly paying subscribers we can provide an incentive or promotion to boost the ratio of monthly paying customers to annual paying customers.
So puting this all together, you can see that understanding purpose and making sense of our customer base leads us to define fitness criteria for each segment we would expect to see a class of service defined. The class of service should enable us to deliver what the customer needs and wants and hence satisfy the customer. This makes us "fit for purpose" in that customer's eyes, and our business will thrive and survive. As a result we will deliver, profitably, on our stated purpose.
How does Kanban help?
So how do we tie this together with Kanban and metrics?
Back to our Starbucks example for a moment. Starbucks operate a kanban system of sorts. The kanban signaling mechanism is the empty cup. When you place an order - the point of commitment - the cup is marked up with your order and placed in the queue for the barista. The espresso machines are capacity constrained - the bottleneck in the system - and their throughput is limited by the speed of the baristas operating them. With drive-thru customers, we are measuring the queuing time prior to commitment, and the delivery lead time following commitment. We have a concept of customer tolerance for these queuing times and have set some service delivery expectations that we manage against. We balance drive-thru capacity againt walk-in capacity, and we offer two classes of service. Drive-thru customers get a higher class of service than walk-ins because we have both a visual management tool for the drive-thru (though this is roughly equivalent to visually inspecting the queue of walk-in customers at the cash register to place an order, and at the delivery counter to receive an order), and we are being quantitatively measured on drive-thru service. This data is electronic and can be aggregated at corporate headquarters so we pay more attention to drive-thru customers.
Because some walk-in customers may be unhappy with queuing and waiting times, or unhappy at being treated as second class, they may self-select to frequent a different cafe. As a result our business evolves. We see less walk-ins and more drive-thru customers. Our profitablity becomes constrained by our ability to service drive-thru (a very physically constrained problem) and augmenting sales with walk-in customers becomes challenging because we are offering them a lower class of service.
Readers knowledgable about Kanban should have recognized a lot of the language in the last two paragraphs. Kanban provides a way of limiting work-in-progress, and signally capacity to pull new work. This reduces lead time and improves the predictability of delivery times. It also provides a focus which has been shown to increase quality and accuracy. So Kanban systems help us manage and deliver on customer expectations. Kanban systems make the commitment point explicit just like the cash register in Starbucks. They also give us explicit queuing time and lead time metrics. We can easily acquire quality metrics such as rework due to defects detected internally, and failure demand due to defects that escaped and were reported by customers.
Kanban also asks us to make policies explicit. So we define ideal capacity allocation across sources of demand or market segments. We are also encouraged to define explicit classes of service.
Kanban provides us three feedback mechanisms with which to review service delivery and fitness for purpose. The standup meeting that gives us visual inspection of how things are flowing, similar to looking up at the visual management screen with the queue of car graphics and the accumulating timers at the Starbucks drive-thru. We have the service delivery review meeting (also known as a system capability review) where we can explicitly review service delivery performance against quantitative fitness criteria measures. And then there is the operations review (the system of systems level service delivery review) where we can review the overall performance of our business against the fitness criteria. This enables us to build a big picture of "how are we doing?" and "are we fit for purpose?"
Kanban reduces lead times, improves delivery predictability, improves quality, helps us manage risk, and provides mechanisms to insure good governance and or regulatory compliance. Across the set of segments your business serves, all of these are likely to be concerns for at least one segment or another. As a result Kanban can be an integral part of making your business fitter for purpose.
Kanban shouldn't be viewed as a back office process improvement technique. It should be viewed as an integral part of operational strategy for creating a business that delights its customers by being fitter for purpose. Classes of service and other policies should be designed to enable delivery against fitness criteria metrics. The kanban system should be designed in alignment with the desired outcome - how much business do you want, and of what type, at what risk? Market segmentation should be revisited periodically and work item types based on sources of demand and their classes of service re-evaluated and redefined periodically to keep the service fit for purpose. By integrating Kanban deeply into your business, you will enable an inherent evolutionary capability that will sense changes in market needs and wants, and shifts in market segmentation and what those segments value. The result is that your business will continue to thrive and survive in face of growing market complexity and uncertainty.