# New Way to Spot Loss in Workers’ Comp

You’ve heard it before, “It’s not the tip of the iceberg that cost you so much; it’s what you can’t see. It’s what’s below the water level that costs you real money.” We hear that the total loss to a company from a workers’ comp loss is six to 10 times the value of that work comp loss. But risk managers have neither the right tools to understand and measure the loss, nor the right tools to improve productivity to capture the cash flow that comes from preventing that loss.

During my initial journey into lean sigma consulting, a seasoned Japanese colleague shared an important concept. While this principle was developed to improve the quality and efficiency of output in manufacturing, it has many other applications, including in improving safety and reducing workers’ comp costs. Understanding and applying the rule has improved the profitability of many companies.

Dr. Genichi Taguchi, a Japanese engineer, theorized (and ultimately proved mathematically) that loss within any process or system develops exponentially–not linearly–as we move away from the ideal customer specification or target value.

An example of Taguchi’s Loss Curve is shown below:

Another way to look at it is this: Anything delivered just outside the target, (labeled as LTL and UTL in the diagram above) creates opportunity for exponential financial improvement as we move toward the center of the U-shaped curve. And the farther away from the target we are, the greater the opportunity.

I explain Taguchi’s principle using an example from a kaizen event that dramatically improved machine setup times within a CNC shop.

For years, our client assumed it took 46 minutes to set up and change over machinery. After all, for 10 years, it did take 46 minutes. But our kaizen team was hired to challenge this thinking.

If the CEO and his team were right, setup times couldn’t be completed any faster. But if setup times could be better, loss had been occurring beneath the water line, which meant the iceberg was growing, but no one knew.

Machine setup time is loss because no value is produced during the setup process. And setup times can represent 35% of the total labor burden, so there’s a lot at stake. While employers can compute labor and overhead costs easily, when their assumptions are incorrect about setup times, they’re losing big money. But rarely do they know it or how much.

Here’s our client’s story:

Our client used people and machinery to produce aircraft parts. Machines were not dedicated to product families or cycle times. In other words, the client could build a Mack Truck or Toyota Corolla on the same machinery. And because setup times were slow, the client built large batches of products. When defects struck, they struck in large quantities, and, financially, it was too late to find causes. The costs were already sunk.

Our client borrowed capital to purchase nine machines, leased the appropriate space to house them and purchased electricity, water, and cutting fluids, as well. Each machine had affiliated tool and dies, and mechanics to service them. In other words, when you own nine machines, you need the gear, people and money required to operate and maintain nine machines. And all of this cost was based on 46-minute setups.

Think about that for a moment.

If the client didn’t need nine machines, it wouldn’t have had to spend all of that money and for all of those years! And a wrong assumption in setup times could be leading to loss that never appeared on any income statement. What would show would be the known labor, materials, machinery and overhead costs. But what wouldn’t show would be what wasn’t needed if the team could complete a setup in less than 46 minutes.

After videotaping, collaborating and measuring cycle times on the existing operations and processes, it was evident: The team had ideas that would challenge the 46-minute setups.

After some 5S housekeeping, the team produced a 23-minute setup. One more day of tweaking, and the team got it down to 16. By the last day, the team was consistently producing 10-minute results.

Now let’s talk about the impact.

Under the better state, the client could indeed produce parts faster. It also needed far less capital, insurance, labor, gear, electricity, fluids, tooling, floor space, etc. And because our client’s customer would now get parts faster, the company would get paid faster.

While banks may not like these facts, clients and employees do. Employees can do their jobs more efficiently, and the company makes more money while borrowing less.

Here’s an explanation of the 5S tool the team used to make their setup times faster. This tool–when used properly––not only improves operating efficiency but removes or reduces safety hazards like: tripping, standing, walking, reaching, handling, lifting and searching for lost items.

In addition, the kaizen event itself creates an opportunity for employees to improve their own job conditions and use their curiosity and creativity to solve production-related problems. The event also creates a more engaged employee, one less likely to file future work comp and employment-related claims.

The 5S Process consists of five steps.

1. Sort the work area out.
2. Straighten the work area out, putting everything in the right place.
3. Clean the entire area, scrub floors, create aisle ways with yellow tape, wash walls, paint, etc.
4. Create standardized, written work processes.
5. Sustain the process

Using the tools like 5S, I continue to improve my thinking relating to identifying, and managing work comp risks. But during each kaizen event, I also gain perspective about why stakeholders rarely change their ways. What I’ve learned is this: Clients typically need to have one of two conditions met for good change to occur.

1. They need to have something to motivate them––which often means facing a crisis.
2. They need to physically see and experience things to believe them.

If you’re like me, you probably need proof, too. Here it is: A reduction in setup times from over two and a half hours to just over ten minutes.

What the Lean Assessment Does

The lean assessment helps find improvement opportunities. That’s because assessments study and measure cycle times, customer demand, value-adding and non-value-adding activities. The assessment helps everyone—including the executive team— see how people physically are required to do their work and understand why they are required to do it the way they are.

In the week-long assessment process, we’re no longer studying the costs of just safety; we’re studying all of the potential causes that drive productivity and loss away from the nominal value. Safety is not necessarily why we are measuring outcomes. Safety is the benefactor from learning how and why the company adds value, and precisely where it creates loss.

That is the power of good change. And good change comes from the power of lean.

The best approach is to dig out and eliminate problems where they are assumed not to exist.” – Shigeo Shingo

# Effective Strategies for Buying Auto Insurance

Shopping for and eventually purchasing auto insurance is not the most enjoyable experience. It’s difficult because each state varies in terms of which specific types of coverage are required and which are not, i.e. luxury coverage. Even more trying is deciding which type of additional coverage you need. Most auto insurance companies profit from the sheer ignorance of the consumer. If you drive one of the 10 vehicles mentioned below, and you are paying quite a bit more than the upper limits, you have a solid case for changing policies. If you do not drive one of the 10 vehicles and are curious about how much you are paying versus what other auto insurers are willing to charge, compare auto insurance now!

Data is derived from compare.com

# How Milton Friedman Got It Wrong

Add Nobel Prize winner, economist Milton Friedman to the list of smartest guys in the room who said, did and taught the dumbest things.

Just what did Friedman say in 1970 that American leaders in 2015 have become so infatuated with?

Here it is. Word for word.

Friedman actually said this stuff about businesses having no social responsibility. And American leaders believed it, and then acted on it.

The result?

It took 45 years, but American leadership finally created for today’s knowledge workers– but not themselves, of course — what University of Massachusetts Professor William Lazonick refers to as “profits without prosperity.” The problem isn’t just the fox guarding the hen house. This is the fox in the hen house, waiting for the chickens to come home to roost.

Sadly, both for American employees and for Friedman, the well educated economist’s theory has for years replaced the golden egg (continuously improving people and process, which should have come first) with the smell of rotten eggs (the remnants of command and control). The evidence: America’s all-time-low employee engagement, our virtually stagnant economy and wage deflation.

American leadership’s hen house now appears, instead, to be more of a dog house.

Let’s face it, we can’t compete globally because modern leaders have failed to capture and engage man’s curiosity and creativity. Because if they had, we would have exchanged our arrogance for our humility, and listened to learn rather than tell. We’d be continuously improving people, because learning comes from people, and improvement comes from learning. Which, in turn, comes about from the detection and correction of errors in our thinking. And we’d be using that employee knowledge to show leaders where wasteful activities exist,  destroying the American people, their personal productivity and their well-being.

I suppose it was easier for Friedman to assign blame to the “intellectual forces…undermining the basis of a free society these past decades,” rather than teach executives the true human value of respect and continuous improvement. Especially when today’s executives earn 300 times more than those they serve.

Who could successfully argue that paying executives so much money doesn’t make their companies better?

Maybe Japanese executives like CEO Akio Toyoda of Toyota, who in 2013 earned just \$2.9 million on \$18 billion of profit. Respecting people; improving people; and improving process and wasteful activities that affect people. And, of course, selling cars to — of all the crazy things — more and more people.

Seems like people do matter, Mr. Friedman. They’re called customers and employees, fathers and mothers, friends and family.

The Japanese circle of Kai and Zen — the art of making change through continuous improvement — is something we need more of in America and throughout the world.

Let’s stop turning to pontificating prognosticators: today’s Tarot card readers using computer-driven analytics. The kind now used to determine people’s job security and personal productivity, especially average people when the time comes for their annual review.

Let’s stop sending the message to society that man’s intrinsic value is irrelevant. An unnecessary component in improving this strictly extrinsically valued society.

In a 1991 article written by Alan Robinson from University of Massachusetts and Dean Schroeder from Valparaiso University paid close attention to the effective use of employee suggestions. Turns out, man’s intrinsic value in other cultures and countries is extrinsically valuable to leaders and stockholders.

Japanese employees turned in 32.5 suggestions per person. American employees turned in 0.11. American leaders implemented just 37% of the employee’s recommendations, while Japanese leaders implemented 87%.

American employers were too busy to listen, and employees too disengaged to contribute.

Meanwhile, America was losing the luster on her once global competitiveness crown, and she didn’t understand why.

Perhaps emphasizing our need to nurture man’s intrinsic value over his lifetime, not just nurture his extrinsic net worth quarter by quarter, still makes sense. Especially if we’re going to improve one another, ourselves and our ability to compete in the global economy. And in that distinct order.

The results of America’s inability to compete today are simply the consequences from the consistent leadership message sent to the willing workers of today and yesteryear: We have little value for your mind, your heart or your soul. Your value to corporate America is, strictly speaking, only from the neck down. Don’t speak or think; we know what’s best for you.

A message better understood by reading Steven Denning’s, Forbes 2011 article, titled, “The Dumbest Idea In The World — Maximizing Shareholder Value.

Or, if you are really ambitious, and enjoy learning from history, read Out of The Crisis. The anti-gospel to today’s American rhetoric on economic and management theory.

The author, Dr. W. Edwards Deming, railed against American leaders, who, way back beginning in the 1940s, assigned regularly occurring production variances to employee failings. This while leaders continued to miss the true causes behind increasing production costs and poor quality. Deming assigned blame for this directly to American leaders, calling for a radical transformation to how America leadership conducts business.

Deming knocked on American leadership’s door but couldn’t come in. Friedman’s puppets had dead-bolted it shut; double locks; top and bottom.

The unlimited asset of human capital Deming talked about — once free for the asking — has now all but dried up.

Will the first country that really wants our human capital please come forward?

As Professor Lazonick points out in his Harvard Business Review article, “Profits Without Prosperity,” during the previous 45 consecutive years, real wage increases, (wages adjusted for inflation) have not increased more than 2% in any three consecutive years but once. And that was during the Internet bubble of 1997, 1998 and 1999.

To put this in lay terms, my 24-, 22-, 20- and 18-year-old children now earn substantially less per hour for the same job that I performed in 1984. And even when I don’t adjust for inflation.

Got milk?

At least recently?

Mine’s going sour; seems I can’t afford a new gallon.

So what can we do differently to improve America’s ability to compete domestically and abroad?

Let’s turn to history and Gen. Douglas MacArthur, Taichi Ohno and the millions of other leaders and customers who collaboratively helped Japan become the second-most productive nation in the world, very shortly and efficiently, after World War II ended.

Rebuilding a nation ravaged by war, but then greatly improved upon by humans — and almost exclusively from the customer’s point of view — Japan used human capital and man’s intrinsic creativity and curiosity to compete on a global basis. Adding greater and greater value to the products American consumers frequently told the Japanese they wanted more of, by putting their money where American leadership’s mouth once was.

What did Gen. MacArthur demand American leaders (working in Japan to re-build the country and the culture) do with the Japanese’s people’s curiosity, creativity and craftsmanship after WWII ended?

He demanded leaders use the people’s intrinsic cultural talents to create sustainable, corporate and societal advantages. In fact, MacArthur required the culture of Japan — one of a highly curious, creative and respectful people — not be challenged, changed nor interrupted by American occupiers. He feared that creativity — Japan’s cultural backbone — could be lost forever.

Sorry, Mr. Friedman, you were wrong in 1970, and you’re even more wrong today.

People matter. All of them.

# The Dangers of Standing Still

One of the most telling episodes of Kodak’s slide into bankruptcy was how it incorporated digital capabilities into its Advantix camera system.

Kodak spent more than \$500 million to develop and launch the Advantix in 1996. The system capitalized on emerging digital capabilities— especially the digital sensors that Kodak engineers had invented two decades earlier—to capture date, time, shutter speed and lighting conditions to produce better pictures. The strategy culminated in the Advantix Preview camera, which allowed photographers to preview shots and mark how many prints they wanted. Kodak gave users no ability to save the digital images, however. The Advantix required traditional silver halide film and prints.

Advantix flopped. Why buy a digital camera and still pay for film and prints? Kodak wrote off almost the entire cost of development.

Kodak’s strategic blunder was not because of a lack of technological prowess; it was because of an inability to embrace business model innovation. Kodak was the market-leading photo film, chemical and paper business. It bet its future on “the hope that demand for digital images would sell more film.” As a result, Kodak protected its traditional business to the bitter end—until others leveraged digital to make film irrelevant.

Judging from recent comments by Carlos Ghosn, Nissan’s chief executive, we might one day read about how Nissan repeated the pattern of Kodak’s decades-long blunder and demonstrated the dangers of standing still during a period of industry innovation (like what’s happening in insurance).

Ghosn has championed his company’s efforts to develop autonomous driving technologies to allow cars to operate without human intervention. And, unlike some other large automakers (such as Toyota), Ghosn does not dispute the technical feasibility of driverless cars.

But Ghosn views the choice of semi-autonomous vs. driverless as a strategic decision—and he is clear that his choice is to use autonomous technologies as incremental enhancements to cars with drivers. As reported by the Associated Press via the New York Times: Ghosn said Nissan sees autonomous vehicles as adding to driving pleasure, and a totally driverless car is not at the center of the automaker’s plans. The autonomous driving Nissan foresees will assist or enhance driving. Nissan may end up with a driverless car, but that was not the automaker’s goal, he said. “That is the car of the future. But the consumer is more conservative. That makes us cautious.”

In other words, Ghosn’s strategy is to hope that the demand for autonomous technologies will sell more cars. Like Kodak, he is aiming to reinforce Nissan’s current business model rather than embrace business model innovation.

By being cautious, however, Ghosn risks emulating Kodak’s failure by waiting for others to leverage driverless technologies to make traditional cars irrelevant. He also risks ceding emerging business innovations to Google, Uber and others willing to make driverless cars their explicit primary goal.

The unanswered question is whether Ghosn, behind the scenes, is parlaying his technological forward-mindedness into strategic preparedness.

Carlos Ghosn need not shed his caution. But, as I previously argued, trillions hang in the balance. Given those stakes, has Ghosn hedged Nissan’s strategic bets in case the driverless “car of the future” comes more quickly than he expects?

Some argue that, of course, Nissan won’t be caught flat-footed even if driverless cars come sooner than expected. Look, for example, at its research partnership with NASA. But research is not enough.

A trap that market-leading companies fall into is believing that they can catch up if their initially cautious strategies turn out to be wrong. One lesson that Paul Carroll and I found in our study of thousands of large company failures is that it is very hard to excise denial from multiple layers of the organization—even after objective evidence argues for doing so. Another lesson is that, while it is possible to catch up on raw technical expertise, it is hard to catch up after yielding multiple product-oriented learning cycles to competitors.

Take electric hybrid cars. A former senior technologist of one of the big automakers told me his company considered but rejected hybrid electric cars before Toyota launched the Prius. The automaker was at first dismissive of the Prius and then surprised by its market success. It did jump into the market with its own offering. But, the technologist bemoaned, it has not been able to catch up. With each model, Toyota gets further ahead. The company ceded too many learning cycles to Toyota.

The same could be happening with driverless cars.

Nissan espouses caution about driverless cars. Whatever research is going on in its labs is mostly hidden from the public (perhaps to not confuse the market or provide succor to competing strategies).

Google, on the other hand, will soon release 25 prototype driverless cars onto the streets of Mountain View, with plans to launch 75 more. Google’s self-driving cars have logged a collective 1.7 million miles and are adding about 10,000 miles per week, mostly on city streets. Google has not cracked all the issues involved with driverless cars. It has, however, created the ability to learn faster.

Kodak, as evidenced by its own tongue-in-cheek marketing video, ended up play “grab ass” for years with digital photography. Late attempts to “get serious” were too late. Even now, 40 years after Kodak engineer Steven Sasson invented the digital still camera, Kodak still struggles to realize the potential of its IP portfolio.

Likewise, every market-leading department retailer of the 1950s and ’60s, such as Macy’s, Woolworth’s and Ames, thought it could contend with discount retailers like Wal-Mart if the need arose.

Only Dayton Hudson took the discounting business model seriously. Rather than watch and wait, Dayton Hudson formed a discounting business unit and unleashed that subsidiary to compete as hard as possible against the traditional business. That discount subsidiary was named Target. Of the more than 300 department-store chains in the U.S. in the late 1950s, only Dayton Hudson/Target successfully moved into discount retailing. Most of the others preceded Kodak on the path to bankruptcy.

Rather than following in the footsteps of Kodak and all those defunct department stores, Nissan should be more like Dayton Hudson.

Instead of just betting on caution, Nissan should also unleash innovators to create its own driverless offering and charge them with competing as hard as possible against its traditional business.

# How to Apply ‘Lean’ to Insurance

If you’re like many employers, you say you run your business in this order: people first, process second and profit last. But for employees and customers alike, they feel as if it’s: profit first, process second, then people last. With 60% to 70% of your employees disengaged, it’s not time to change the way they think, but the way you think first.

If you do, you’ll make more money by putting things in the right order.

How you run your business indicates how you sell. With more agents “spreadsheet selling,” just based on numbers, learning how to identify and remove root causes of customer problems has gone by the wayside. One could argue that few producers even know how to sell anything other than spreadsheets. When there are other alternatives for customers, however, spreadsheets add no real value in customers’ eyes.

Toyota’s definition of adding value, along with that of other companies that have adopted the principles of lean manufacturing, is the one to study when trying to improve your business and help customers improve theirs, too. At Toyota, it really is people first, process second and profit last.

Before we get to how to apply Toyota’s thinking to insurance, let’s study how its version of lean manufacturing made its way from America to Japan.

Early on during World War II, America was in desperate need of quality and speedy production to build machinery to fight and win the war. Tanks, airplanes, guns and submarines were in short supply when Japan surprised America at Pearl Harbor.

The U.S. government turned to the Training Within Industries program to educate American manufacturers on how to improve quality and reduce costs while increasing the rate of production. With a crisis threatening to destroy everything we knew, we developed an enlightened sense of purpose. American executives listened and changed the way they looked at people and how they built things. The principles of lean were born.

After WWII ended, Gen. Douglas Mac Arthur was given full responsibility to rebuild the Japanese economy. When he arrived, he found devastation, burned-out cities with no functional capacity and people existing on just 800 calories per day. He also discovered he had no way to distribute propaganda necessary to convince Japanese citizens about what Americans wanted to achieve.

With quality Japanese radios in short supply, MacArthur turned to Bell Labs, which turned to employee Dr. Walter Shewhart for help improving radio communications. Shewhart, who was unavailable, recommended that 29-year-old engineer Homer Sarasohn be sent to Japan, to teach statistical quality control. Sarasohn then spent four years working closely with Japanese scientists and engineers, improving their knowledge about how to best manufacture and sell goods and services.

When Sarasohn left in 1950, the reins of teaching continuous improvement were turned over to Dr. W. Edwards Deming. Deming expanded on what Sarasohn began, and lean manufacturing took hold at hundreds of companies, including Toyota, one of the many Japanese companies Deming consulted for until he died in 1993.

Today, Toyota is known for its driving principle; respect for people is the core to the culture. All decisions for improvement are made with this principle in mind. Even when it comes to reducing labor costs, respect for people is at the forefront. For example: Toyota has never laid off a single employee. It has, instead, turned to employees to improve their processes by finding wasteful steps and activities that impede value customers demand.

And when it comes to profitability, Toyota’s profits in 2013, exceeded Ford, GM and Chrysler combined, even though Toyota built roughly half the number of cars.

So, how can you as an insurance agent/risk manager use the same concepts to grow and improve your business?

Quite simple:

1. Improve capacity by first engaging employees in identifying wasteful activities. Then reduce or eliminate the activities. Activities such as:
1. (T)ransporting something.
2. (I)nventory–keeping too much or failing to meet customer demand.
3. (M)otion–looking, reaching or stooping to get something that isn’t in its best place.
4. (W)aiting for information. How often do you wait while someone else produces material? How much time is spent waiting for loss runs, proposals, and other data?
5. (O)verproducing information. For example: sending out copies of emails to multiple parties unnecessarily–emails that take time to be read by each recipient.
6. (O)veranalyzing information or taking too much time to make a decision.
7. Creating (D)efective information that must be redone. Certificates, proposals and routinely changing human resource policies come to mind.
8. Failing to maintain a (S)afe working culture.

These are, based on the initials, the TIMWOODS of waste, and identifying them is your starting point.

1. As capacity improves, employees have more time on their hands. The first cost you’ll reduce is overtime. That’s because employees will meet production demands better. Remember, you’re looking for reducing, or eliminating altogether, processes and activities that add no customer value. A secondary benefit? Employees won’t feel that their valuable skills are wasted on activities they don’t enjoy anyways.
2. As capacity improves, share what you learned about your improvement efforts with customers and their supply chain. You’ll be busy with ample prospective opportunities.
3. Then offer to work with customers and their supply chain to teach them how to use what you’ve learned.
4. Develop strategies using your new capacity to expand your business. Focus on creating opportunities that reduce risk and improve internal and external customer efficiencies. That’s value through the eyes of your customer.

Don’t believe lead times matter within the service industry? Look at what Western Union accomplished: Lead times were reduced from 22 days to just 19 minutes.

Lean has benefits to offer the entire insurance and risk management community. We’ve prioritized profits over processes and people and missed out. It’s time to re-order our priorities.