What is operational excellence?

Improving a business is about more than just increasing efficiencies or maximizing ROI. Today’s global economy also requires the flexibility to adjust to changing markets, conditions and technologies. Operational excellence is a way for organizations to create a roadmap toward continuous improvement in a complex business environment.

Its goal is to give companies a competitive advantage. If done right, operational excellence helps business leaders make better decisions and employees show continuous improvement. Companies that are better at problem-solving and process improvement, the theory goes, will ultimately exceed their competition in profitability.

Here, we’ll explore the core principles of operational excellence and how companies are using technology to implement these methodologies.

Operational excellence (OpEx) is an approach to business management that emphasizes continuous improvement across all aspects of the business and within all business processes by creating a culture where management and employees are invested in business outcomes and empowered to implement change. When implemented well, every member of an organization sees the flow of value to the customer and, if problems arise, finds a solution before any disruptions occur.

Operational excellence begins with a culture shift, where all leaders and employees are dedicated to creating not only a quality product but also providing great customer experiences. Businesses that use operational excellence methodologies clearly define leadership and workforce roles and how they work together to improve operations. At all levels, employees can initiate change and drive toward efficiency, effectiveness and agility.

The definition of operational excellence has its roots in the Shingo Model, an approach to business that emphasizes quality at the source, value to the customers, a zero-inventory supply chain and an understanding of the workplace at all levels. It was created by Dr. Shigeo Shingo, a business leader who published 18 books on his philosophy and closely collaborated with Toyota executives to apply his principles in their manufacturing operations.

Shingo is also the inspiration for the Shingo Prize, awarded annually by the Shingo Institute for Operational Excellence at Utah State University. This prize defines the 10 Shingo Guiding Principles, often referred to as the core principles of operational excellence:

• Respect every individual: When people feel respected and valued by an organization, they are more likely to give more. Respect seeks to draw the best from individual contributors.
• Lead with humility: When decisions are made unilaterally, frontline employees are less likely to respect the decisions being made. To lead with humility, companies must implement a management system where leaders seek input and buy-in from stakeholders at all levels.
• Seek perfection: This principle is similar to the adage, “You have to believe it to achieve it.” By seeking ways to continuously improve, you can open the door to new ways of thinking and innovation.
• Embrace scientific thinking: This principle is not just about being data-driven. Creating a culture where employees are able to “experiment” and test new ideas based on observations and data fosters innovation.
• Focus on process: If something goes wrong, instead of blaming people (which can be counterproductive), look for ways the process can be improved.
• Assure quality at the source: Much like good food is made with good ingredients, assuring quality in business relies on doing work right the first time, using the right people and the right components.
• Improve flow and pull: Providing value to the customer means having the products that they demand when they need them and nothing more, which is exemplified in lean supply chains.
• Think systemically: Instead of focusing on individual players or departments for improvement, think of ways to improve the entire system.
• Create constancy of purpose: Communication of goals, purpose, commitment to the customer and the “why” behind the company are key to operational excellence.
• Create value for the customer: Ultimately, all businesses are all about the customer, so operations should reflect the value customers hold and should be provided.

As the Shingo Model gained popularity within the business world, others developed methodologies based on this approach and the core principles of operational excellence. These include:

• Lean manufacturing: Lean manufacturing is a systematic method designed to minimize waste while keeping productivity constant.
• Six Sigma: Six Sigma is a set of methodologies, tools and techniques used to improve processes and minimize defects. It’s sometimes combined with lean manufacturing principles and then known as “lean Six Sigma.”
• Kaizen: Focused on continuous improvement, Kaizen emphasizes teamwork and proactively taking responsibility for designated areas within the organization to make incremental improvements.

When implementing operational excellence within an organization, it can be helpful to view the process as an ongoing journey rather than a final destination. Because the focus is on continuous improvement, business leaders and employees should always strive for ways to get better at what they do.

That being said, organizations need to establish goals and define metrics to understand if and how they are improving. These metrics include key performance indicators (KPIs), such as sales increases, health and safety performance and workforce retention rates.

Here are the types of goals that are often included in operational excellence-based processes:

• Operational goals: How the company operates, including efficiency and safety. For example, an organization might seek to accelerate order to cash, solve problems with the supply chain or improve the delivery of services.
• Financial goals: Metrics related to sales and losses. These goals could be to lower churn, efficiently enter new markets or improve the marketing-to-sales pipeline.
• Culture and workforce goals: These include measuring worker satisfaction, offering professional development and investing in worker retention. This could entail initiatives to create a more inclusive culture, creating a more equitable compensation package or incentivizing professional development.

Value flow to customers

Operational excellence goals are typically focused on delivering value to the customer. What is value? Essentially, it’s what the customer demands and is willing to pay for.

Within the operational excellence methodology, companies provide this value by creating value streams. A value stream refers to the processes and initiatives that an organization creates to deliver the products and services the customers’ need in the time it takes to meet that demand.

For example, a data center that can keep up with customer demand and has the compute, storage and networking resources needed to service online transactions without overprovisioning is seen as a value stream that is running smoothly.

Communicating operational excellence

Communication is another key element for reaching operational excellence goals. If employees aren’t aware of company goals, have no idea how to deliver value to the customer or feel leadership is not invested in their professional success, it makes it difficult to achieve goals and continuously improve.

Implementation often includes a plan for communicating all aspects of the program, such as the mission, goals and those impacted to all employees. Companies that excel in operational excellence often have a well-designed internal communication system, as well as a forum for receiving and addressing feedback.

Operational excellence requires organizations to look critically at their operations and how they manage employees. In some cases, they must be willing to shift their culture. Being open to continuous change helps companies better implement methodologies and reach these benefits:

• Optimized workflows: Part of creating an unhindered flow of value to the customer is being able to see and address roadblocks, supply chain issues and misaligned priorities. When using business management tools, companies can gain visibility into workflows and business processes to make them more efficient. For example, with better workflow modeling, they can get to the root cause of bottlenecks and redundancies and eliminate overproduction or waste.
• Lower operational risk: Reducing risk is a primary goal of any business strategy, and a primary benefit of operational excellence. With the efficiencies that it brings, companies can also lower operating costs and increase revenues, especially when compared to competitors.
• Standardized work and outcomes: Having standards of how work should be done and what the end product looks like improves efficiency and overall business outcomes.
• Accountability: Defining roles and providing performance evaluations at all levels ensures that people have clear expectations.
• Employee empowerment: Instead of a “top-down” culture where the CEO has a hand in business decisions throughout all departments, operational excellence strives to create a model where leadership makes strategic decisions and empowers frontline employees with the resources and decision-making abilities they need to succeed.

Operational excellence can benefit just about every industry and business model, however, there are some industries where operational excellence has become a standard in operations: 

• Manufacturing: Companies like Motorola and BAE Systems have employed operational excellence methodologies to enhance productivity, decrease downtime and cut out waste.
• IT: Using the core principles of operational excellence gives IT teams a way to minimize development rework and improve workflow efficiency in a fast-paced environment.
• Healthcare: With a focus on customer experience, operational excellence helps healthcare providers reduce wait times, improve patient portals and better track patient outcomes.
• Construction: Using operational excellence helps construction companies ensure worker safety, efficient workforce management and cost-effective sourcing of materials.

Automation, process analysis, observability and data and business management tools can help companies more quickly implement—and stick with—continuous improvement.

Business automation

Companies have been looking to automation for decades to create efficiencies and harness the power of digital technology. This could include automating hands-on tasks on the assembly line with machinery or automating back-office tasks like accounting and billing with software solutions.

There are many tasks that require creative thinking, intuition and strategy planning that only people can perform. However, automation tools can be used to perform the repetitive and mundane tasks, such as prepopulating invoices with account information and transferring data to multiple back-end systems that can save people time:

• Business process management software: The business process management approach is iterative; you don’t implement it once, never to be touched again. Instead, you design, model, create, simulate, monitor and optimize your processes on a regular basis. Business process management tools help companies maintain this iterative process to create, analyze and improve business processes for continuous improvement.
• Process mining: Companies use process mining to figure out if their standard work processes are working as designed. Process mining tools use event log data, such as from customer relationship management (CRM) or accounting software, to analyze how processes function and look for improvement. These tools go beyond process mapping and can be used to test implementing improvements. Check out this blog post to learn more about the differences between process mining, process modeling and process mapping.
  • Process modeling: A key concept in operational excellence is identifying abnormal flow—where the process has broken down—and figure out how to fix it. Process modeling gives a visual representation of business processes or workflows that companies can use to identify opportunities for efficiencies and better workflow. If a company wants to know what’s happening at every step of their supply chain process, it would use data modeling.
  • Process mapping: Organizations gather information from employees to create a visualized model of the workflows. If a company wants to clarify which departments own each part of the procurement process, it would use data mapping.
  • Decision management: Companies recognize that streamlined, automated decision-making is key to being able to respond quickly to market pressures and pivot without losing momentum. When policies and business logic are embedded directly into application code, it can take weeks or even months for IT to recode. Decision management software allows business users to model and manage operational decisions that are repeatable, automated and in compliance with business guidelines and regulations.
  • Robotic process automation: Robotic process automation, also known as software robotics, uses automation technologies to mimic back-office tasks of human workers, such as extracting data, filling in forms, moving files, et cetera. It combines APIs and user interface (UI) interactions to integrate and perform repetitive tasks between enterprise and productivity applications. By deploying scripts which emulate human processes, RPA tools complete autonomous execution of various activities and transactions across unrelated software systems.

IT automation

In today’s digital-first age, customer satisfaction depends on the performance and availability of business-critical applications and infrastructure. As such, IT operations (ITOps) teams are under immense pressure to deliver operational excellence and must move at the pace of increasing business demands. AIOps drives efficiency and optimization in a modern, dynamic IT environment to accelerate necessary digital transformation.

Using software to create processes that reduce or replace manual interaction with IT systems, AIOps brings real-time insights to IT environments so that IT operations teams can assure proactive, continuous application performance that enables exceptional customer experiences, while increasing compliance and safely reducing cost across high variability of demand:

• Full-stack enterprise observability: Modern applications, services and environments are continuously becoming more complex, and traditional monitoring tools lack the visibility that’s required to achieve the operational excellence needed in these new environments. Enterprise observability platforms, powered by automated APM, deliver full visibility by automatically ingesting observability metrics, tracing every request and profiling all processes across microservice platforms and the CI/CD pipeline. Enterprise observability enables ITOps teams to discover, map and monitor the full application stack, including all interdependencies, providing immediate feedback after any change.
• Application resource management (ARM) and optimization: Businesses often face the challenge of balancing the right number of resources for business applications while limiting as much overallocation as possible. When organizations come to terms with overallocating any of their applications, it is often unsustainable and costly. Modern applications are separated by multiple layers of abstraction, making it difficult to understand which underlying physical server, storage and networking resources are supporting which applications. Application resource management drives OpEx by automatically assuring applications get the resources they need to perform, no matter where they run or how they are built. ARM eliminates resource congestion at every level of the application stack, from the business application to the underlying hybrid and multicloud environment.
• Proactive incident resolution, remediation and avoidance: A few seconds of application downtime can cost millions in lost revenue, reputational damage or regulatory penalties. To avoid these pitfalls, enterprises want to better predict IT outages and resolve them more quickly. With proactive incident resolution and remediation, ITOps teams gather new insights faster and with context, transforming user experiences and improving business outcomes. Proactive incident management platforms use explainable AI to help CIOs and ITOps teams detect and diagnose complex issues by connecting the dots between structured and unstructured data in real-time to give users a holistic understanding of IT incidents, enabling businesses to drive toward operational excellence within their IT estate.

Integration

As transformation efforts quicken across the globe, they also introduce a serious side effect—pushing data out into silos and impeding access to information that business teams need to be successful. Organizations that can quickly and securely connect applications and systems will outperform those that don’t. Without the right integration tools, data stays locked away, hampering your ability to make informed business decisions and implement scalable automations that uncover new efficiencies:

• API management: APIs are in use everywhere. They connect your systems and applications so you can access and expose your data in a secure way. Having a strong API management strategy and toolset is critical to being able to create, manage, secure and socialize APIs with internal and external consumers.
• Application integration: To make effective business decisions, you need to ensure you can trust your data. With application integration, you can move and transform data between applications and systems—no matter where it resides—so existing and newly deployed applications are seamlessly integrated throughout your organization.
• Event streaming: To optimize value flow to customers, businesses need to gain insights from real-time data to make informed choices that improve operations and act quickly in response to shifting customer needs. Event streaming allows you to capture and integrate streaming event data from your applications so you can automate customer-facing and backend actions based on defined triggers.
• Enterprise messaging: With an explosion in the number and types of systems within a typical enterprise, cost-effective, scalable system-to-system integration has become a challenge. Enterprise messaging is a proven technology that connects systems and their data in the most flexible, highly available and secure way. Critical data, like a financial transaction, is sent between systems in the form of messages and held in a queue if it can’t be delivered immediately (like in the case of a system outage) to ensure it’s sent successfully, never lost and never sent more than once.
• High-speed file transfer: Companies that need to transfer very large files over long distances under varying network conditions are challenged by the Internet’s underlying transfer technology, Transmission Control Protocol (TCP). Fast, Adaptive and Secure Protocol (FASP) takes a different approach to file transfer, allowing businesses to achieve transfer speeds of 100x faster than traditional methods.

Seven ways IBM can help companies achieve operational excellence using intelligent automation:

• Completely understand your processes before you automate with process mining.
• Put automation in the hands of your employees with digital workers.
• Improve productivity and reduce errors with RPA.
• Assure application performance with smarter resource management.
• Improve application performance monitoring with observability.
• Connect your apps and data to automate your business.
• Manage your API lifecycle with API management.