The Origins of Wasteful Practices: Healthcare at the Crossroads

Most healthcare organizations would be offended to hear themselves categorized as production systems.  We will argue, however, that many healthcare organizations do in fact operate as production systems, inefficient and wasteful ones at that.  We will argue that the tacit assumptions underlying the organization of traditional health delivery systems derive from the same metaphysical and philosophical origins as their production systems counterparts and that these are wasteful precisely because of like practices, generated by acting upon the same shared assumptions.  We will argue, furthermore, that the waste generated by both kinds of organizational entities remains in large part invisible to accounting because accounting practices themselves derive from the same historical origins.

Some modern production systems have understood the origins of waste in the coding of their tacit assumptions and practices and are trying to change course by distinguishing operations from processes, a distinction that opens the door to a new interpretation of waste.  Lean Production, a Toyota invention, discriminates 7 kinds of waste, all of which are operational.  We believe, despite Toyota’s success in driving waste out of operations, that these kinds of waste are only the tip of the iceberg.  Healthcare organizations are generally distant followers of industry in the identification and elimination of waste, but elimination of waste from operations is not enough.   “Healthcare is now at the Crossroads”; an even more powerful interpretation of waste is required to achieve both qualitative and quantitative improvements in the patient experience, outcomes and financial results.

The dominant common sense in our Western philosophical tradition, inherited by industry and healthcare organizations alike, asserts that “substance” or “stuff” is what the world is made of; it is decomposable and best understood when fragmented into as many parts as possible.  The problem of philosophy is, then, to understand the principles and causes of “stuff”.  Newtonian physics deals with the properties and peculiarities of “stuff”.  Problem solving for Descartes requires decomposing problems into as many parts as possible in order to understand the problem and find a solution.  Decomposability, in this tradition, assumes the independence of parts, whether they are things, ideas or problems.  It also assumes a certain similarity of the part to the whole.  The ability to reconstruct the whole assumes, finally, that the whole is the sum of its parts.

A certain style of organization (in time and space) of discrete entities, each with their own particular logic and purpose, all sharing common goals, each and all contributing summatively, underlies and explains to a large degree the success of Western culture from the time of ancient Rome to the military expertise of Frederick the Great whose organizational know-how became the model for the organization of work in the industrial revolution.  Production is seen as the sequential adding or assembly of parts in an ordered fashion to create a whole.  All of the “stuff” required to “sum” into a product are called assets and these create wealth; the “costs” required to finance and get the stuff, store and handle it, convert it and/or put it together, are called liabilities and either destroy or are claims against wealth.

Management accounting accounts for operating efficiency, appearing first in single activity enterprises, in order to measure costs against revenues.  The “processes” that are “costed” tend to be discrete and sequential operations involving a single activity.  This seemed to make sense in those single activity industries that characterized the initial period of the industrial revolution and appears to have served those industries well, at least until the world changed and left the posterity of said industries faced with one of three systems alternatives, evolution, revolution or death.  For not a few, the bell has tolled.

Today’s world is a different place.  Classical mechanics now seems quite simplistic in a world more at home with quantum physics.  Einstein was not the first to challenge the assumptions of the Newtonian world, but things would never be the same after his devastating attack on the previously held common sense.  Some very competitive companies now use applications of chaos theory to manage their logistics and achieve productivities double or triple those of companies still using linear programming, a war of the worlds, so to speak, in which the Cartesian world is becoming the loser; the loser to a stronger interpretation of the world and its stuff.

Most enterprises that transform matter and energy into products compete in an environment that must, more often than not, offer a greater variety of products, each day more personalized, a far cry from the single activity structures of the first phase of industrial organization with its standardized products. For decades now, large complex manufacturers such as the airplane or petrochemical industries have migrated from vertically designed functional companies to matrix type organizations that attempt to reconcile the realities of transformation processes with vertical function silos; the complexity of processes imposes its reality on the business and demands cross functional coordination of processes as well as functional goals and objectives.  The world of discrete activities executed in a sequential summative fashion has given way to parallel processes, and the need to integrate continuous and discontinuous processes, often in real time, creates an excruciating demand for coordination.  “Relevance Lost”. Coordination requirements have become a significant part of the enterprise, often equal to the “investment” in so-called assets and the premises behind the accounting model have, to a great extent, lost their relevance.

Why do we say that have lost their relevance?  To remain competitive in today’s world, industry must not only meet the need for Six Sigma quality, but also vary and personalize products. Enterprises must then find a way to differentiate themselves in some significant way to gain a competitive advantage.  When all products are seen as roughly equivalent, the ability to differentiate must turn to service.  When all service is seen as equivalent, the ability to differentiate must turn to the relation with the customer, and finally to the creation of a unique customer experience.

We have now reached the crux of the problem of waste.  As enterprises migrate from products to service, from service to customer relationships, and from customer relationships to unique experiences, the competitive burden lies squarely on the shoulders of the right hand side of the balance sheet; what creates value for customers and for the business lies with the organization’s so-called liabilities not with its so-called assets.  In systems theory, this is not an evolution, but a revolution.  Assets become liabilities and liabilities become assets

So, when Toyota focuses on Lean Management with its 7 kinds of waste, it is still centered on the old accounting model in which waste is seen essentially as a phenomenon of operations.  As organizations migrate more to service, relationships and the customer experience, the waste found in “operations” pales in comparison to other kinds of waste.  What makes it more difficult still is that value is produced as much or more from so-called liabilities than from so-called assets, so cutting “costs”, in the traditional common sense, may end up destroying what are now being called “intangible assets” (a neologism to describe certain kinds of accounting “liabilities” in the new world of work).

Even before product competition began to migrate to service competition, the notions of waste were flawed.  One can agree that the 7 kinds of waste identified by Ohno are indeed important.  One can also assume, for example, that negotiating with suppliers is an important skill and that a bad negotiation can be enormously costly in the short, mid and long term.  Where would that waste show up?  Let’s also assume that a manufacturing company can replicate Dell’s arrangement with suppliers and have inventory availability without owning inventory, but then chooses not to.  Where does that waste show up?  Dell has a negative 6 to 7 percent cost of working capital.  If is possible for other businesses to do the same but they fail to do so, where does the cost of opportunity show up?  The point is that enterprises harbor enormous wastes that are for them invisible, not because they can’t be seen; these enterprises cannot see them because they are cognitively blind, blind to their blindness.  This blindness is in the DNA of their inherited tradition and culture.  In today’s complex organizations, the wastes due to cognitive blindness are greater than the 7 kinds of wastes identified by Ohno.

When Cementos Mexicanos improved its fleet productivity by 400% using logistical practices based on chaos theory, no reference points were available to predict the amount of hidden waste available for removal. The final waste was the gap between 1.9 deliveries per truck per day and 8.5 deliveries per truck per day, a huge waste to say the least, but never visible or accounted for.  Cementos Mexicanos (Cemex) changed its interpretation of the ready-mix business, a change in the deep structure of business understanding, from product centric to customer centric, and then developed the business processes required to produce the best order-to-delivery service in the world.

There are at least seven or more wastes that may be even more significant than those put forth by Ohno, but the ontology is vastly different, holistic and relational, not discrete and sequential.  These wastes are related to weak or non existent competencies centered in the right hand side of the balance sheet, such as listening, trusting, making and keeping promises, interpreting, designing, managing moods (positive moods such as ambition, curiosity, resolution etc. versus negative moods such as envy, resentment, resignation, apathy, etc.), and constructive dialogue, to name seven.  There are certainly more.  Developing and leveraging these competencies, along with others, turns them into assets that produce enormous value for the company.  Not developing them results in costly wastes that damage the expectations of all stakeholders.

Hidden waste is the waste that lives in the gap between what “is” and what “could be”, as long as the cost to bridge the gap is less than the value created. Hidden waste also includes the cost of opportunity involved in not eliminating the gap or not eliminating it as soon as possible.  This is not only true in operations but in every business relationship and every coordination between internal and external stakeholders.  Waste is everywhere.  Identifying and crossing the gap is not difficult, but it does require acquiring and moving with new interpretations, practices and skills and unlearning old interpretations, practices and habits.

Let us now return to healthcare organizations, our initial point of departure.  When the world is seen as a closed system, the Cartesian atomistic way of thinking that has dominated much of Western tradition dissects “stuff” into components and orders stuff into logically related heaps.  This is an effective way to accumulate a certain kind of knowledge, the efficacy of which shows up in the dominance this kind of thinking has held over the last several centuries.

When the world is seen as an open system, the dynamic relationship of what we call a “system” (always in the foreground of what we call “its environment”) comes into view.  “Systems” are arbitrary because the “limits” that define “the system” are always chosen as a matter of convenience, to enable the conversation about a certain “it”.  Western medicine has lived in both traditions, both atomistic and holistic, specializing In the in-depth understanding of extremely limited domains such as “cataracts”, or larger domains such as “eyes”, or “eyes, ears, nose and throat”, but also looking at systems, “respiratory”, “circulatory”, etc., and often the interrelationships among these systems, or, in the case of general practitioners, extending this understanding to the health and well being of the patient, his or her family background, occupation and habits.  While medical practitioners may choose to live in one or the other of these traditions, patients are mostly concerned about their health and well being, so healthcare should focus on that system that is most relevant to the health and well being of patients.

Healthcare today for the most part operates in what we have called the “Cartesian” tradition, the tradition of “bits and bytes”, “silos and sequences”.  The operation of the organization resembles the industrial age production line.  It initiates with data collection, specific tests, diagnostic, and then a treatment plan.  This work is carried out by functional areas each specialized in its task.  The treatment plan is then passed to different areas that prepare the intervention itself and prepare the patient for the intervention.  The intervention follows.  Drugs are ordered and administered, procedures performed and therapy organized.  Following this step, the patient is turned over to the recovery silo and finally discharged.  There may be limited post-discharge monitoring of the patient to assess response to the treatment.  This may result in re-admission and rework.

This Cartesian view of healthcare focuses on the identification and elimination of some health problem but may have little to do at all with “health care”.  Certainly the main functional areas involved in each step of the operation see themselves as the customer for each preceding step, just as would happen in a single activity production plant, and the transformation process is focused on “the problem”, its bits and pieces.  The “problem” happens to be accompanied by what is called “the patient”.

Ohno’s seven kinds of waste flourish in this kind of operating environment.  Eliminating these wastes, including the costs of quality, can make an important economic contribution to the organization.  These wastes are relatively easy to identify and to remove.  These wastes are visible, like the tip of the iceberg.  What is not visible in the inherited tradition of operations improvement involve the focus of the business, the power of the present interpretation, and the business processes that must be coordinated throughout the system and with key external stakeholders to reveal the entire iceberg of waste and make it disappear.  Hidden waste may be significantly larger than current net profits, but this benefit would be the result, not the purpose for eliminating waste.  The purpose is to take care of the concerns of all relevant stakeholders, principally those of the patient.

The principal concerns of the patient have to do with well being and health.  Well being and health have to do with a number of things, some inherited, and the lack of well being and health shows up in conditions.  Focusing on the patient and organizing around patient conditions and the cycles of care involved are the key business processes around which most of the organization’s processes must be aligned and synchronized; this means dynamic networks of promises in which internal and external customers and every individual promise holder has a first and last name and responsibilities to perform according to clear standards and within a specific framework of time.  Effective work means making and keeping promises in quality and time, getting the job done.  Efficient work means doing it as quickly as possible and with the least amount of resources.  Both effective and efficient work require impeccable coordination throughout the entire “net-work” of individual and group commitments.

It becomes clear that designing and organizing commitments organization-wide, in which knowledge and skills are deployed on a mass scale, day in and day out, make these so-called “intangible assets” the most important designers, architects and constructors of value for the healthcare organization and its customers.  This is especially relevant in organizations that are competing on service, client relationships and the customer experience.  Each step is more dependent on the application of knowledge and skills through networks of commitment, not through summative tasks carried out in isolated functional silos.  Organizations that do not know how to listen, trust, make and keep promises, interpret, design, manage moods, and engage in constructive dialogue are literally wasting their time, wasting away their present and their future. They are not competent to engage in the network of coordinated promises required to produce spectacular outcomes and financial results.  All else is waste.