📖 The New Economics for Industry, Government, Education

1993. W. Edwards Deming

Shortly before his death the same year, Deming published this his final book at the ripe age of 93.

While he had been publishing in academic journals throughout his whole career, his first book for public consumption was Out of the Crisis (1986), which was originally published by MIT four years earlier under the title Quality, Productivity, and Competitive Position. In it, he introduced his famous “14 Points for Management”.

Japan

Deming is most famous for his work in post war Japan. He first visited the country in 1947, when it was occupied by the Allies, to assist with planning a census. Over time, he was invited to teach statistical control to local Japanese industrialists and his concepts of quality rapidly grew in popularity there.

HIs worked contributed in part to the “Japanese economic miracle”, a record period of economic growth that kicked off post-World War II in which Japan went from being decimated by war, to the second largest economy in the world in an incredibly short time.

The Japanese Union of Scientists and Engineers established the Deming Prize in honour of his work, and in 1960, the Prime Minister of Japan awarded Deming with Japan’s “Order of the Sacred Treasure” for his contributions to Japan’s industrial rebirth and its worldwide success.

Years later when he returned to the US again, he was still largely unknown at home. Until in 1980, a 4 part “white paper” show by NBC called If Japan can … Why can’t we? featured Deming prominently.

“Much of what the Japanese are doing, we taught them to do. And the man who did most of the teaching is W. Edwards Deming, a statistical analyst for whom Japan’s highest industrial award for quality productivity is named”.

This kick started another wave of popularity for Deming, in his home country this time, as US companies turned to Deming, starting with Ford and continuing right up to his death 13 years later.

The core of the book is Deming’s system of profound knowledge. However before getting stuck into that, the first two chapters set the scene by describing how we are “living under the tyranny of the prevailing system of management”, with suggestions for better practice.

“How are we doing?”

Quality

Deming’s focus has always been on quality. Considering his work has been applied predominantly on factory floors, this has meant narrow applications for manufacturing such as new processes to reduce defects. But Deming thinks of quality in the broadest sense. “The basic problem anywhere is quality” he says, describing it as an attribute of any product or service that “helps somebody, and enjoys a good and sustainable market.”

Crisis

As with the his previous book, with a more direct title—‘Out of crisis’—Deming writes this book for American industry, to help them climb out of the crisis he believes they are in.

At the start of the 20th century, the US made half the manufactured product of the world. These good times continued through to the middle of century, post World War II and to when Deming started teaching in Japan. And writing now at the end of the century, there seems to be no doubt that the US economy has fallen well behind. “We in North America must accept the fact that we no longer excel in the manufacturing of low-cost items in great volume”, adding that “our problem is education and development of a culture that puts value on learning”.

Responsibility

Ask someone in an organisation if they are in favour of improvement of quality, and they will of course be in favour. Ask them how, and you will get a list of suggestions that each “duck the responsibility of management.” Throughout the book, Deming repeatedly asserts that quality can’t be delegated to workers on the front line. Quality is determined by the prevailing system of management, which he contends requires a total transformation.

In my experience, most troubles and most possibilities for improvement add up to proportions something like this: 94% belong to the system (the responsibility of management), 6% are attributable to special causes.

Transformation of Management

Deming believes the “present style of management” serves only to “dig deeper the pit that we are in.” He takes one chapter to lay out some quick recommendations for moving out of the present system and into another.

Of course, these recommendations are not simple suggestions for around the edges, but instead fundamental changes in approach that are likely considered radical by many.

Abolish ranking and the merit system

When you start to think of your whole company as a system, the subsequent changes needed to support that are dramatic, not least for how you manage and rate individual performances. For Deming, “ranking is a farce”, because “apparent performance is actually attributable mostly to the system that the individual works in, not to the individual himself”. For me, this is a huge point and so i’m going to let Deming explain it himself:

Let x be the contribution of some individual, and (yx) the effect of the system on his performance. Then suppose we have some number for his apparent performance, such as eight mistakes during the year, or sales of $8M. Then

x + (yx) = 8

We need x. Unfortunately, there are two unknowns and only one equation. Johnny in the sixth grade knows that no one can solve this equation for x .Yet people that use the merit system think that they are solving it for x. They ignore the other term (yx), which is predominant.

The statistician that he is, Deming believes that ranking comes from a basic failure to understand variation from common causes, something which he covers in greater depth later, and tried to demonstrate with his frequently used red beads experiment.

“Abolish next Monday morning the merit system in your company”.

Abolish incentive pay and pay based on performance

Another easy one, eh. “Reward for good performance may be the same as reward to the weather man for a pleasant day”. And not only is it dictated by the system, but it also serves to take peoples focus away from the overall aim of the business in favour of focusing on isolated numbers.

“No amount of care or skill can in workmanship can overcome fundamental faults of the system.”

Manage the company as a system

“The first step in any organization is to draw a flow diagram to show how each component depends on others”. In a system, interaction is the key and managing these interactions requires a more holistic approach. MBO was in vogue at the time, and arguably still is just with a more refined version of OKRs. Deming warned against this practice however, of breaking down an overall objective into individual objectives for people, teams, business units, etc.

Don’t set numerical goals, instead work on the method

“By what method?” is another phrase uttered through the book. For Deming, a numerical goal accomplishes nothing, only the method is important and organizations would be better to focus on how to improve particular processes. “Anybody can achieve almost any goal by, A) redefinition of terms, B) Distortion and faking, C) Running up costs.”

This has many applications, but one more interesting one is Deming’s suggestion to abolish commission for sales people. From his observations, salaried sales teams work out better for customers, colleagues, and for the business as a whole.

It is wrong to suppose that if you can’t measure it, you can’t manage it—a costly myth.

Ultimately, the way we manage today is “a modern invention, a trap that has led us into decline”. It has not always existed, and does not have to continue to exist if we chose alternatives.

The main thesis of the book is Deming’s System of Profound Knowledge, which was the culmination of his life’s work. Hi tied together his seminal theories and teachings on quality, management and leadership into four interrelated areas: Appreciation of a system, Knowledge of variation, Theory of knowledge, and Psychology.

Appreciating a system

A system is just a network of interdependent components that work together to try and accomplish an aim. The greater the interdependence between components, the greater will be the need for communication and cooperation between them. In Deming’s work, there were some great examples of how this kind of systems thinking was used to flip competition into cooperation. Particularly around the rebuilding of Japan, where whole industries operated as a system to help the economic recovery; for example competing firms joining together to rebuild shipping ports and infrastructure essential for them all.

One insight I enjoyed was Deming’s assertion that “If the various components of an organisation are all optimised, the organisation will not be. If the whole is optimised, the components will not be.” Organisations are very focused on maximising output from individual employees, but what if that is at the expense of the overall business and it’s aims?

“Management of people requires knowledge of the effect of the system on the performance of people”

Understanding variation

There is always be variation, the question is what is that variation trying to tell us about a process, and the people that work in it? In Deming’s signature playful tone, he humorously attempts to teach the reader about some basic principles of variation, for example “Half of pupils will be above average on any test, and the other half below. There is not much that anyone can do about it.”

Special causes, and common causes

Deming views this basic understanding of variation as an essential skill for management today.

“The most important application of the principles of statistical control of quality is in the management of people.”

What he is referring to specifically is knowledge about the two kinds of variation; variation from common causes and variation from special causes.

Common causes over a long enough period of time eventually all fall inside control limits which, once established, are consistent. A special cause is something unique, a once-off event that falls outside the control limits.

Time of arrival of school bus

Tampering

Referencing work from his mentor Walter Shewhart, Deming outlines two costly mistakes frequently made in attempts to improve results:

1. Reacting to an outcome as if it came from a special cause, when actually it came from common causes of variation.
2. Treating an outcome as if it came from common causes of variation, when actually it came from a special.

If you try and direct efforts at the wrong source of the problem, you only make things worse.

Theory of knowledge

Knowledge is built on theory. Or more specifically, “through systematic revision and extension of theory based on comparison of prediction with observation.” Only by testing your theories, can you then learn their “inadequacies”, and then update them, or develop new ones altogether. But without a theory, there is nothing to revise.

Without theory, experience has no meaning. Without theory, one has no questions to ask. Hence without theory, there is no learning.

Operational definitions

There is no true value of any characteristic, state, or condition that is defined in terms of measurement or observation. Change of procedure for measurement or observation produces a new number.

According to Deming, there is no such thing as a fact “concerning an empirical observation”. It all comes down to the operational definitions being applied by the observes. To illustrate this point he uses an exercise from a professor of statistics, Dr. Mary Leitnaker. She empties a packet of the classic animal crackers on a table and asks her pupils to count the number of each animal. But quickly a conversation ensues around whether broken crackers should be counted, or at what point should deformed crackers be discarded in the count. “A change of rule, changes the count of cows”

Psychology

A good portion of this section revolves around the differences between internal and external motivations, which i’m not going to capture in any detail here. But it contributes to his strong views on how we compensate and rewarding staff. We know that he sees it as impossible to effectively rank individuals in a system, but here he adds that even if you could, why would you?

Even if a method were developed to rank people with precision and certainty, distinct from the process that they work in, why would anyone suppose that this would improve people or the process?

PDSA Cycle

Before wrapping this up, I want to also quickly reference what Deming called The Shewhart Cycle for Learning and Improvement. It is a flow diagram “for learning and for improvement of a product or of a process”.

It originated in Deming’s teachings in Japan in 1950, and went on to influence many similar versions, most notably six sigma, and lean loops.