Reading an article on the HBR site triggered many nascent thoughts. The article argues that some CEO decisions are based on the fact that their compensation is solely linked to the share price of the firm. You can view the article here- http://hbr.org/2010/06/column-you-are-what-you-measure/ar/1
Share price is the outcome of the current and the expected future performance of a firm. This, also only in an ideal situation where there is no price manipulation. The current and the future expected performance comes from a series of decisions. The decisions could be about sources of funds, types of markets, manufacturing facilities, etc. So, the share price is essentially an outcome of a series of decisions.
About 50 years back process control ideas rocked the manufacturing industry. Instead of accepting or rejecting a product at the end of manufacturing cycle, effort was focused on ensuring the right set up, right tools, right trained operators, etc. to ensure a correct product. Process control advocated strengthening the process to ensure good products. The focus of measurements were process parameters and not end product features.
Till the product reaches the end of the line, it is subjected to significant additional work. In this sense, the finished product is more expensive than the raw material. When significant amount of finished products are found to be defective it causes high rework cost. In some cases managers dilute the quality guidelines to ensure the product is accepted. In still some other cases, sometimes, managers cheat to show that the products are as per norm. This is because with the end of pipe measurement, the cost and stake of having a rejected product is just too high.
This is what precisely happens in one number outcome based measurements. CEOs would do almost anything to ensure that this number stays up. Such measurements are the root of many corporate scams. The process shifts from ensuring good processes to ensuring good results. Just like in a shop floor, good results can rarely come from weak processes.
The people to blame in most such cases are those who set and reward on the basis of such measures. It is definitely easy to use the stock price for CEO incentive, but it is definitely not a good measure. For one, it is merely a measure of outcome and not about the method or process strength in the organisation. Two, the stock price is a lagging indicator. The price goes down after the performance is reported as poor. In some cases it could be too late to affect an improvement. Three, it is not very difficult to manipulate stock price movement over a short term without a change or performance. This incentives short term behaviour among executives who might want to cash in and move out.
This idea is not limited to CEO measurement alone. It can easily be expanded to measure every professional in every area. The key is to measure the means of doing work. Good outcome is a function of good means and vice versa is not necessarily true.
Thursday, October 7, 2010
Sunday, September 5, 2010
Is being Green a luxury?
The CEO of a logistics group related to a major retailing company thundered that "green" was not something they could afford. Right now they want to set the supply chain right and think of being green at a later stage. He further added that being green was a branding exercise which his company did not need at this stage.
The young CEO created two divisions - right supply chain and green supply chain and his speech clearly indicated that these were different. I guess the CEO is not alone in having these views. To a good extent we academicians and a few consultants are responsible for propagating green as a mechanism of adding an extra cost to be more environment friendly.
http://www.sustainable-supplychain.com/Sustainability_is_Free___The_Case_for_Sustaina.pdf
The article above cites the example of quality movement. Earlier, the basic idea of 'cost' of quality was prevalent. Quality was something that would be checked for after the product was made. It was about inspection and segregating good and bad products. Today, the term is 'cost of poor quality'. Quality is built in at every stage and includes product design, maintenance, and every function in the organisation. The major change was to have quality in every process to have a good quality product.
Has this increased the 'cost' for firms? In certain areas, may be yes. But overall, the yields have gone up, the rejections reduced and the customers more satisfied. This shift was not overnight and it happened over a long span of time. Some companies are in fact discovering this fact in the last few years only.
It is same with green and sustainability issues. Today, being green means installing a good effluent treatment plant or using expensive technology to emit less carbon. This is very similar to the end of the pipe quality concept followed earlier. With time, I am sure the young CEO and his brethren will realise the difference. Every individual has to work in a way to avoid wastage and every process has to be green. Its just a matter of time for sustainability to be a compulsion to do business.
The young CEO created two divisions - right supply chain and green supply chain and his speech clearly indicated that these were different. I guess the CEO is not alone in having these views. To a good extent we academicians and a few consultants are responsible for propagating green as a mechanism of adding an extra cost to be more environment friendly.
http://www.sustainable-supplychain.com/Sustainability_is_Free___The_Case_for_Sustaina.pdf
The article above cites the example of quality movement. Earlier, the basic idea of 'cost' of quality was prevalent. Quality was something that would be checked for after the product was made. It was about inspection and segregating good and bad products. Today, the term is 'cost of poor quality'. Quality is built in at every stage and includes product design, maintenance, and every function in the organisation. The major change was to have quality in every process to have a good quality product.
Has this increased the 'cost' for firms? In certain areas, may be yes. But overall, the yields have gone up, the rejections reduced and the customers more satisfied. This shift was not overnight and it happened over a long span of time. Some companies are in fact discovering this fact in the last few years only.
It is same with green and sustainability issues. Today, being green means installing a good effluent treatment plant or using expensive technology to emit less carbon. This is very similar to the end of the pipe quality concept followed earlier. With time, I am sure the young CEO and his brethren will realise the difference. Every individual has to work in a way to avoid wastage and every process has to be green. Its just a matter of time for sustainability to be a compulsion to do business.
Friday, August 6, 2010
Fun theory
Controlling human behaviour is a major task in business. For businesses with presence in multiple countries this is number one priority. There are standard carrot and stick approaches that organisations follow to control behaviour and limit deviation. So, if a person comes late for three days in a month, she loses half a day's salary. A vendor who faults on quality pays a steep fine. Bonuses are awarded to employees who achieve a certain target.
Nothing wrong with this approach. I personally have been a big proponent of a structured measurement system for employees. I have advocated that the financial incentives must be structured to incentivise the required behaviour. Reverse is also true. So, if a boss promotes a subordinate who does not question him at all and has a subservient and obedient behaviour, chances are that majority of his subordinates will behave like that. Some companies have incentives for sales professionals not just according to value and volume, but also according to the mix of the products sold. So, at least 20% (or some 'x' %) of the products sold must be those from a certain basket.
There is another way. Have a look at this site: http://www.thefuntheory.com/virals
Do have a look especially at the third video, the staircase one.
It is a new perspective on controlling behaviour. It s about making it 'fun' to act in a particular manner. Staircases that make a piano sound, a dustbin with sound affects or a bottle recycling machine that doubles as a game are all simple examples. In all cases they managed to achieve the desired affect. People did start using the stairs more. The dustbin did gather more garbage.
As business leaders we need to put our thinking caps. Yes, deviant thinking is difficult. But it is necessary. We need to insert some 'fun' into our businesses. Employees should enjoy coming to work. Their should be some pleasure in following the processes. This is a surely a very sound recipe to create path breaking innovations and high performance organisations.
Yes, business is serious business. There are billions of Rupees (or Euros) at stake. Does this mean that we need to not smile while working? Maybe people who understand the hows and whys of human behaviour would add more value to this topic. This is precisely the Virgin (Branson) way of doing work and I am sure many of our businesses would do better that way.
Nothing wrong with this approach. I personally have been a big proponent of a structured measurement system for employees. I have advocated that the financial incentives must be structured to incentivise the required behaviour. Reverse is also true. So, if a boss promotes a subordinate who does not question him at all and has a subservient and obedient behaviour, chances are that majority of his subordinates will behave like that. Some companies have incentives for sales professionals not just according to value and volume, but also according to the mix of the products sold. So, at least 20% (or some 'x' %) of the products sold must be those from a certain basket.
There is another way. Have a look at this site: http://www.thefuntheory.com/virals
Do have a look especially at the third video, the staircase one.
It is a new perspective on controlling behaviour. It s about making it 'fun' to act in a particular manner. Staircases that make a piano sound, a dustbin with sound affects or a bottle recycling machine that doubles as a game are all simple examples. In all cases they managed to achieve the desired affect. People did start using the stairs more. The dustbin did gather more garbage.
As business leaders we need to put our thinking caps. Yes, deviant thinking is difficult. But it is necessary. We need to insert some 'fun' into our businesses. Employees should enjoy coming to work. Their should be some pleasure in following the processes. This is a surely a very sound recipe to create path breaking innovations and high performance organisations.
Yes, business is serious business. There are billions of Rupees (or Euros) at stake. Does this mean that we need to not smile while working? Maybe people who understand the hows and whys of human behaviour would add more value to this topic. This is precisely the Virgin (Branson) way of doing work and I am sure many of our businesses would do better that way.
Saturday, July 24, 2010
Bottom of the pyramid employees
In businesses that are bottom heavy (ignore the pun) like retail, transportation and warehousing, there is usually a significant difference of salary between the top and the bottom. The CEO of a retailing firm could have a salary package that is 200 to 400 times more than the package of a worker who manages the cash register. Such businesses are also characterised by high attrition of low salary scale employees and also have lower training expenses.
That lower rung employees will have an attrition of around 15% per month is assumed to be a unchangeable fact. Firms design all their processes around this fact. These businesses try to "McDonaldise" their shop floor processes and reduce the dependence of employee knowledge on business. Employees are specialised in a particular task and department. So, a cash counter person will do just that. A person in the toys section will do just that. They set up a tall hierarchy based structure to ensure process compliance. They have a strong recruitment division and also they foster partnerships with recruitment consultants. The salary of the lower rung workers is kept at a minimum and they are trained only if they stay with the company for more than a year. It seems logical. If they are going to leave, it does not seem sensible to waste resources on these employees.
A retail firm in Spain has turned this logic on its head. They pay their shop floor level employees higher, and invest significantly more in their training. Mercadona, a Spanish retailer, has sales per employee that is 18 times the average for Spain and 50 times higher than the USA. They have an attrition rate of only 3.5% per year. Look at the article here - http://bit.ly/mercadona
Its the vexing issue of questioning the assumptions. Bottom of the pyramid employees are directly in contact with the customers. Customers need intelligent employees. A McDonald's with 15 items only on the menu can standardise every little thing. A super market with 1500 items cannot do this. Many times sale happens because of good selling by the employees. And employees become good at selling only if they are on the job for some time and they feel good about the job that they are doing.
Another way to look at it is the cost issue. A store clerk would have a salary or around Rs. 45,000 per year only. A retail CEO can have a salary of around Rs. 20 million. Assuming a store has 400 ground level staff, their total package would still less the package of the single CEO. A 20 % increment amounts to Rs. 750 per employee per month. In an apparels store if one employee sells one extra shirt, this cost is easily recovered. It may not be as simple as this. A salary hike for the shop floor workers would have a domino affect increase for the supervisors and above also. Yet, the impact would not be a difference of life and death for the organisation.
If it has been done in Spain, I am sure it can be done in India also. But, someone needs to challenge the basic assumption. Some firm needs to start at recognising that the bottom of the pyramid employees are important. They need to move from lip service to actually facilitating these employees. Sam Walton had said, "I take care of my employees, they in turn take care of my customers". Someone needs to actually put this into practice.
That lower rung employees will have an attrition of around 15% per month is assumed to be a unchangeable fact. Firms design all their processes around this fact. These businesses try to "McDonaldise" their shop floor processes and reduce the dependence of employee knowledge on business. Employees are specialised in a particular task and department. So, a cash counter person will do just that. A person in the toys section will do just that. They set up a tall hierarchy based structure to ensure process compliance. They have a strong recruitment division and also they foster partnerships with recruitment consultants. The salary of the lower rung workers is kept at a minimum and they are trained only if they stay with the company for more than a year. It seems logical. If they are going to leave, it does not seem sensible to waste resources on these employees.
A retail firm in Spain has turned this logic on its head. They pay their shop floor level employees higher, and invest significantly more in their training. Mercadona, a Spanish retailer, has sales per employee that is 18 times the average for Spain and 50 times higher than the USA. They have an attrition rate of only 3.5% per year. Look at the article here - http://bit.ly/mercadona
Its the vexing issue of questioning the assumptions. Bottom of the pyramid employees are directly in contact with the customers. Customers need intelligent employees. A McDonald's with 15 items only on the menu can standardise every little thing. A super market with 1500 items cannot do this. Many times sale happens because of good selling by the employees. And employees become good at selling only if they are on the job for some time and they feel good about the job that they are doing.
Another way to look at it is the cost issue. A store clerk would have a salary or around Rs. 45,000 per year only. A retail CEO can have a salary of around Rs. 20 million. Assuming a store has 400 ground level staff, their total package would still less the package of the single CEO. A 20 % increment amounts to Rs. 750 per employee per month. In an apparels store if one employee sells one extra shirt, this cost is easily recovered. It may not be as simple as this. A salary hike for the shop floor workers would have a domino affect increase for the supervisors and above also. Yet, the impact would not be a difference of life and death for the organisation.
If it has been done in Spain, I am sure it can be done in India also. But, someone needs to challenge the basic assumption. Some firm needs to start at recognising that the bottom of the pyramid employees are important. They need to move from lip service to actually facilitating these employees. Sam Walton had said, "I take care of my employees, they in turn take care of my customers". Someone needs to actually put this into practice.
Tuesday, July 13, 2010
Growth through capacity
A decade back idle capacity was abhorred. It was the duty of the plant manager to ensure that everyone was kept busy and the machines kept churning out material. High utilisation was a rule to balance the high costs of capacity. This also led to large batch sizes and long product runs. This was the time when demand was relatively stable, competition was manageable, retailers had low bargaining power and organisations were sure that sooner or later they would sell everything that they produce.
The ripples caused by the recession and the subsequent recovery have ensured a high variance in demand. There is a steady increase in the product variety being offered. Competing players are also coming out with new products and innovative promotions. Retailers are also more adamant on the exact type of products they need. Organised retailers can in fact bully manufacturers and brand owners in product assortment and dispatch frequency. Given this scenario, now the companies are laden with many products that they are not able to sell.
In the first scenario, the only cost of inventory was the cost of interest for the amount carried. This was a minor cost. If the cost of working capital was 12% (assumed for simplicity sake) and a product stayed in the factory warehouse for a month, the carrying cost would be only 1%. The product margin more than made up for this cost. Now, with the risk of the product not getting sold at all this inventory holding cost has shot up.
Directly reducing inventory would reduce customer service. Especially with a higher variety and fluctuating demand, low inventory would lead to low fill rates. This would lead to high costs of not lost customers. Factories operating at high utilisation would have inflexible and rigid production schedules. A change of customer requirement is usually met through inventory. With low inventories, a change would have to be met with a change of production schedules. Again, with low inventories, A change of production schedule will invariably cause a stock out of some other product B.
Demand variability is very difficult to control. So, it seems inevitable that companies learn to live with high inventories and high wastage. They can of course try to squeeze costs from vendors and other service providers. This is precisely what companies are indulging in now. What the companies need to do at this stage is to re look at the way they 'cost' capacity.
Look at this article here:
http://www.livemint.com/2010/07/12233422/HUL-aims-to-react-faster-to-ma.html
The largest consumer goods company in India, HUL is planning to combat the volatility with capacity expansion. They are planning an increase in the capacity levels and a few places like the Selvas plant has doubled their existing assembly lines.
Excess capacity is definitely cost. But here again, like the inventory of the earlier era, machines are sooner or later likely to be used. Having spare capacity means that the manufacturer is more flexible. They can be more responsive to the existing market demand and give the customers exactly what they want. Making consumer goods is not like making rockets. The lead time to make a product is a few hours provided the capacity exists. Thus firms can drastically cut inventories if they have spare capacity.
Yes, the machines would be idle and the operators would also not have anything to do once in a while. But, overall the total costs would reduce and the fill rates would go up. Cheers to HUL for this change. Now with the leader showing the way, may be the others will follow.
The ripples caused by the recession and the subsequent recovery have ensured a high variance in demand. There is a steady increase in the product variety being offered. Competing players are also coming out with new products and innovative promotions. Retailers are also more adamant on the exact type of products they need. Organised retailers can in fact bully manufacturers and brand owners in product assortment and dispatch frequency. Given this scenario, now the companies are laden with many products that they are not able to sell.
In the first scenario, the only cost of inventory was the cost of interest for the amount carried. This was a minor cost. If the cost of working capital was 12% (assumed for simplicity sake) and a product stayed in the factory warehouse for a month, the carrying cost would be only 1%. The product margin more than made up for this cost. Now, with the risk of the product not getting sold at all this inventory holding cost has shot up.
Directly reducing inventory would reduce customer service. Especially with a higher variety and fluctuating demand, low inventory would lead to low fill rates. This would lead to high costs of not lost customers. Factories operating at high utilisation would have inflexible and rigid production schedules. A change of customer requirement is usually met through inventory. With low inventories, a change would have to be met with a change of production schedules. Again, with low inventories, A change of production schedule will invariably cause a stock out of some other product B.
Demand variability is very difficult to control. So, it seems inevitable that companies learn to live with high inventories and high wastage. They can of course try to squeeze costs from vendors and other service providers. This is precisely what companies are indulging in now. What the companies need to do at this stage is to re look at the way they 'cost' capacity.
Look at this article here:
http://www.livemint.com/2010/07/12233422/HUL-aims-to-react-faster-to-ma.html
The largest consumer goods company in India, HUL is planning to combat the volatility with capacity expansion. They are planning an increase in the capacity levels and a few places like the Selvas plant has doubled their existing assembly lines.
Excess capacity is definitely cost. But here again, like the inventory of the earlier era, machines are sooner or later likely to be used. Having spare capacity means that the manufacturer is more flexible. They can be more responsive to the existing market demand and give the customers exactly what they want. Making consumer goods is not like making rockets. The lead time to make a product is a few hours provided the capacity exists. Thus firms can drastically cut inventories if they have spare capacity.
Yes, the machines would be idle and the operators would also not have anything to do once in a while. But, overall the total costs would reduce and the fill rates would go up. Cheers to HUL for this change. Now with the leader showing the way, may be the others will follow.
Monday, July 5, 2010
Profits from expansion
The hypermarket chain Hypercity has 7 stores in India currently - three in and around Mumbai and 4 in other cities. Shoppers Stop had a 19% equity in the store which they have increased to 51%. Now they want to open eight new stores by next year and expect to triple their revenues to 1000 crores (from current 330 crores) by FY2012. The statement from the group says that this will lead the groups to break even in the FY2012. The detailed article is here:
http://retail-guru.com/shoppers-stop-eyes-around-rs-1000-crore-revenues-from-hypercity/
Let me bet....I do not see Hypercity breaking even in FY2012. Hypercity will of course have new and creative reasons in 2012. Unless something radical happens, I am sure that I will win my bet. Let me explain.
Expansion helps improve the profits if it leads to better utilisation of existing resources. If a retailer has 5 stores in a city, starting say 3 more could help. The supply chain infrastructure would be more or less the same. The same overheads (city office infrastructure and professionals, buying team, etc) that earlier took care of 5 shops would now take care of 8 shops. The only new cost in opening the 3 stores would be the cost of employees in the store. So, there is a good chance of increasing the net profit for the retailer.
For Hypercity, each location is a large store and has a baggage of huge overhead attached to it. Every individual Hypercity store would have to replicate all these expenses. There would be very little central overhead that would be shared. As mentioned in the article, 60% of the store's sales are foods. Since the food preference is regional in nature the merchandising and the buying team would have to be different for every region, or for that matter every store. Since every store would be in a different city, new supply chain infrastructure would have to be set up.
So, assuming that they follow the same policy, it is difficult to imagine Hypercity making profits with expansion.
McDonald's in India had a model where they limited themselves to around 30 stores in a few pockets for 4 years. They made all the stores profitable, mapped the necessary processes, created the support infrastructure and then had a full blast expansion. McDonald's was a proven global brand. They had most of the processes available and could have implemented the same in India. Their India people were smart and they instead expanded slowly.
At Rs. 330 crores from 7 stores, the current revenue comes to an average of Rs. 45 crores per store. In 2012, when the news release expects Hypercity to break even, the 8 new stores would only be one year old. It would be reasonable (or optimistic) to assume that each of these 7 new stores would also have a revenue of around Rs. 45 crores in 2012. This totals up to Rs. 360 crores. The existing 7 stores would have to get Rs. 640 crores and this comes to more than Rs. 90 crores per store. What we are talking of here is a 100% jump in revenue in just two years. Surprisingly the news release mentions that the strategy would be the same. I am not sure if it is wise to expect the same strategy to yield such amazing hyper growth for Hypercity.
Expansions help improve profits if the basic model is correct. Else the expansion could merely be postponement of the inevitable failure. To use expansion as a way out of losses is a tried and tested methodology and it has almost always led to failure. Somehow business professionals have a scant respect for history and they forget that history repeats itself.
http://retail-guru.com/shoppers-stop-eyes-around-rs-1000-crore-revenues-from-hypercity/
Let me bet....I do not see Hypercity breaking even in FY2012. Hypercity will of course have new and creative reasons in 2012. Unless something radical happens, I am sure that I will win my bet. Let me explain.
Expansion helps improve the profits if it leads to better utilisation of existing resources. If a retailer has 5 stores in a city, starting say 3 more could help. The supply chain infrastructure would be more or less the same. The same overheads (city office infrastructure and professionals, buying team, etc) that earlier took care of 5 shops would now take care of 8 shops. The only new cost in opening the 3 stores would be the cost of employees in the store. So, there is a good chance of increasing the net profit for the retailer.
For Hypercity, each location is a large store and has a baggage of huge overhead attached to it. Every individual Hypercity store would have to replicate all these expenses. There would be very little central overhead that would be shared. As mentioned in the article, 60% of the store's sales are foods. Since the food preference is regional in nature the merchandising and the buying team would have to be different for every region, or for that matter every store. Since every store would be in a different city, new supply chain infrastructure would have to be set up.
So, assuming that they follow the same policy, it is difficult to imagine Hypercity making profits with expansion.
McDonald's in India had a model where they limited themselves to around 30 stores in a few pockets for 4 years. They made all the stores profitable, mapped the necessary processes, created the support infrastructure and then had a full blast expansion. McDonald's was a proven global brand. They had most of the processes available and could have implemented the same in India. Their India people were smart and they instead expanded slowly.
At Rs. 330 crores from 7 stores, the current revenue comes to an average of Rs. 45 crores per store. In 2012, when the news release expects Hypercity to break even, the 8 new stores would only be one year old. It would be reasonable (or optimistic) to assume that each of these 7 new stores would also have a revenue of around Rs. 45 crores in 2012. This totals up to Rs. 360 crores. The existing 7 stores would have to get Rs. 640 crores and this comes to more than Rs. 90 crores per store. What we are talking of here is a 100% jump in revenue in just two years. Surprisingly the news release mentions that the strategy would be the same. I am not sure if it is wise to expect the same strategy to yield such amazing hyper growth for Hypercity.
Expansions help improve profits if the basic model is correct. Else the expansion could merely be postponement of the inevitable failure. To use expansion as a way out of losses is a tried and tested methodology and it has almost always led to failure. Somehow business professionals have a scant respect for history and they forget that history repeats itself.
Thursday, June 17, 2010
Vendor Capacity Planning
Boeing has decided to its capacity to produce the super successful Boeing 737 from the current 34 planes a month to 35 planes a month in early 2012. Read the article here:
http://www.dailymarkets.com/stocks/2010/06/16/boeing-boosts-737-production/
It may seem surprising that a 3% hike in capacity (from 34 to 35 planes per month) should take more and 18 months. Unfortunately this scenario exists in many industries. Even though significant opportunities exist, firms are unable to ramp up capacity fast enough to take advantage. In some cases, the demand piles on in the form of backlog. However, in many cases customers gravitate towards less deserving competitors and the demand is lost.
The issue in most cases is that firms ignore to plan the capacities of their vendors. Making a product will need all the items as per the Bill of Materials (BOM). A constraint in even one single BOM component will limit the expansions. The problem here could be as small as water availability at a key vendor or in some cases the disposition of the vendor to expand the business.
A key component in supply chain planning would be to monitor and keep track of the capacity on the supply side. It is necessary for firms to ensure that all the necessary vendors build enough capacity and are able to ensure the necessary supply. The OEM needs to take the lead time to build capacity at its vendors in consideration. Only then can the real increase in output happen.
http://www.dailymarkets.com/stocks/2010/06/16/boeing-boosts-737-production/
It may seem surprising that a 3% hike in capacity (from 34 to 35 planes per month) should take more and 18 months. Unfortunately this scenario exists in many industries. Even though significant opportunities exist, firms are unable to ramp up capacity fast enough to take advantage. In some cases, the demand piles on in the form of backlog. However, in many cases customers gravitate towards less deserving competitors and the demand is lost.
The issue in most cases is that firms ignore to plan the capacities of their vendors. Making a product will need all the items as per the Bill of Materials (BOM). A constraint in even one single BOM component will limit the expansions. The problem here could be as small as water availability at a key vendor or in some cases the disposition of the vendor to expand the business.
A key component in supply chain planning would be to monitor and keep track of the capacity on the supply side. It is necessary for firms to ensure that all the necessary vendors build enough capacity and are able to ensure the necessary supply. The OEM needs to take the lead time to build capacity at its vendors in consideration. Only then can the real increase in output happen.
Saturday, May 15, 2010
Maintenance budgeting
I am a frequent traveler in the new AC buses started by BEST (Mumbai public transportation). They are very comfortable buses and they run more or less on time. Generally there is a place to sit and it goes significantly faster than the other buses. Lastly given the record breaking heat and the pollution around, the bus presents a great option.
Early last month I saw that the digital watch in one bus was not working. Next, in a few buses I saw the radio/ speaker system not functioning. Yesterday I saw a bus with the LED display that shows the destination in a faulty state. All this is really surprising since the buses are less than 6 months old.
Somewhere 'maintenance planning' is not a part of the budget and operations in many organisations. Assets wear out. In any business that is dominated by such assets, it is imperative that some resources are committed to ensure a certain minimum level of performance. Maintenance is a big expense these days and companies have to ensure that this is budgeted in the capital budgeting plans and the reasonable costs taken care of. Besides the cost, there has to be a seperate process to ensure that defective and worn out parts are replaced regularly.
Maintenance is not rocket science. Most equipment have a specific life cycle and need replacement in a specific time period. Organisations have to factor this and create individual or group replacement policies for components. The overall aim would be to ensure that the asset gives the desired performance for the longest possible time period.
Early last month I saw that the digital watch in one bus was not working. Next, in a few buses I saw the radio/ speaker system not functioning. Yesterday I saw a bus with the LED display that shows the destination in a faulty state. All this is really surprising since the buses are less than 6 months old.
Somewhere 'maintenance planning' is not a part of the budget and operations in many organisations. Assets wear out. In any business that is dominated by such assets, it is imperative that some resources are committed to ensure a certain minimum level of performance. Maintenance is a big expense these days and companies have to ensure that this is budgeted in the capital budgeting plans and the reasonable costs taken care of. Besides the cost, there has to be a seperate process to ensure that defective and worn out parts are replaced regularly.
Maintenance is not rocket science. Most equipment have a specific life cycle and need replacement in a specific time period. Organisations have to factor this and create individual or group replacement policies for components. The overall aim would be to ensure that the asset gives the desired performance for the longest possible time period.
Wednesday, April 28, 2010
Dell to ship by sea
This will be the fourth post of Dell on my blog. The first three are available at:
http://bit.ly/9S5nGz
Now, Dell is planning to actually use ships (water route) to move products. Read this article here:
http://bit.ly/bewrOV
Fundamentally using ships will increase the lead time. Direct affect of this is an increase of in transit inventory. With a higher lead time, the forecasts are also 'more' wrong. So to meet the same service levels, Dell would have to maintain a higher inventory of whatever they plan to send by sea. There would be an overall increase in inventory levels. On the other side, there would be a drastic reduction in the transportation costs. The catch is to compare the total cost and make the decision accordingly.
In the IT hardware industry, a major part of the cost of carrying inventory is the obsolete unsold stock. Thumb rule estimates say that a finished product is obsolete within a year. Dell could select some products - finished goods or components (raw material) that do not have such a high obsolescence rate and then ship them by sea. A DVD drive may not change in configuration as frequently as a microprocessor (an assumption, please correct if I am wrong). Thus they may have a good cost advantage.
Unfortunately, life is not as simple. Shipping by sea would mean that Dell would need an entire new set of people and processes to handle sea shipments. This would be a huge cost. When Dell had all the components coming by air, assembly planning would have been an easy operation. Everything for one order would have come individually. Now, there would be some components that would be ordered for every requirement and others (shipped by sea) that would have to be pulled from stock. This would surely contribute complexity and ensure faulty delivery.
There would be two drastically different supply chain processes. The packaging for air cargo and ships would be different. The documentation would be different. Ordering policies, reorder points, etc. will have to be different. Managing this difference in one company, and especially when the organisation does not have prior experience and expertise in managing this diversity would be very difficult. I have my own doubts of the success of this move.
Dell has had a drastic drop in their sales - to the tune of almost 20% in financial year 2009. The sales revenue has decreased from $ 61 billion in FY 2008 to $ 51 billion in FY 2009. Logistics is always and unfortunately the first target of companies facing such a downturn. The seek to maintain the bottom line (in spite of the reduction in top line) by reducing expenses. Again unfortunately for these companies, logistics cost has a direct bearing on service levels (and product availability). An 'unsmart' reduction in logistics cost would further decrease revenue and put more pressure on cost reduction. This would start a never ending cycle leading to destruction. Best of luck Dell.
http://bit.ly/9S5nGz
Now, Dell is planning to actually use ships (water route) to move products. Read this article here:
http://bit.ly/bewrOV
Fundamentally using ships will increase the lead time. Direct affect of this is an increase of in transit inventory. With a higher lead time, the forecasts are also 'more' wrong. So to meet the same service levels, Dell would have to maintain a higher inventory of whatever they plan to send by sea. There would be an overall increase in inventory levels. On the other side, there would be a drastic reduction in the transportation costs. The catch is to compare the total cost and make the decision accordingly.
In the IT hardware industry, a major part of the cost of carrying inventory is the obsolete unsold stock. Thumb rule estimates say that a finished product is obsolete within a year. Dell could select some products - finished goods or components (raw material) that do not have such a high obsolescence rate and then ship them by sea. A DVD drive may not change in configuration as frequently as a microprocessor (an assumption, please correct if I am wrong). Thus they may have a good cost advantage.
Unfortunately, life is not as simple. Shipping by sea would mean that Dell would need an entire new set of people and processes to handle sea shipments. This would be a huge cost. When Dell had all the components coming by air, assembly planning would have been an easy operation. Everything for one order would have come individually. Now, there would be some components that would be ordered for every requirement and others (shipped by sea) that would have to be pulled from stock. This would surely contribute complexity and ensure faulty delivery.
There would be two drastically different supply chain processes. The packaging for air cargo and ships would be different. The documentation would be different. Ordering policies, reorder points, etc. will have to be different. Managing this difference in one company, and especially when the organisation does not have prior experience and expertise in managing this diversity would be very difficult. I have my own doubts of the success of this move.
Dell has had a drastic drop in their sales - to the tune of almost 20% in financial year 2009. The sales revenue has decreased from $ 61 billion in FY 2008 to $ 51 billion in FY 2009. Logistics is always and unfortunately the first target of companies facing such a downturn. The seek to maintain the bottom line (in spite of the reduction in top line) by reducing expenses. Again unfortunately for these companies, logistics cost has a direct bearing on service levels (and product availability). An 'unsmart' reduction in logistics cost would further decrease revenue and put more pressure on cost reduction. This would start a never ending cycle leading to destruction. Best of luck Dell.
Saturday, April 10, 2010
takes a thief to nail another
Pharmaceutical companies, I feel, make too much money. Making money is not a problem, but to do it under the guise of a 'noble' profession or creating artificial non tariff barriers is definitely not right. Bayer has some cancer drug and Cipla has introduced a copy cat version at 10% of the price. Read the article in Economic times.
http://economictimes.indiatimes.com/news/news-by-industry/healthcare/biotech/pharmaceuticals/Cipla-makes-cancer-drug-cheaper/articleshow/5776074.cms
Point one - To invent a radically new drug there are high R&D costs. Every drug maker needs to have a business advantage for some period of time so that it can recover the cost of this R&D. This is what the patents do. In this period pharmaceutical companies price medicines more than 100 times the material (and variable) cost as they have to recover the sunk costs (R&D). The debate is on the length of this free run time. With pharmaceutical companies having profitability significantly higher than the average corporate rate, it is obvious that the free run period is a bit longer than what it should be.
Point two - Cipla says that they are introducing the new drug for Indian patients. I doubt this. They are doing it to make money. Like I said before, the material cost in such cases is less than 1% of the sale price. Since Cipla has not done the basic R&D for the product they would be making a huge profit on the drug. They do not have any other major fixed cost to recover. If they were really interested in 'serving' the Indian patients, they could have offered it at a 10% or 50% margin over the material cost. This they will surely not do.
http://economictimes.indiatimes.com/news/news-by-industry/healthcare/biotech/pharmaceuticals/Cipla-makes-cancer-drug-cheaper/articleshow/5776074.cms
Point one - To invent a radically new drug there are high R&D costs. Every drug maker needs to have a business advantage for some period of time so that it can recover the cost of this R&D. This is what the patents do. In this period pharmaceutical companies price medicines more than 100 times the material (and variable) cost as they have to recover the sunk costs (R&D). The debate is on the length of this free run time. With pharmaceutical companies having profitability significantly higher than the average corporate rate, it is obvious that the free run period is a bit longer than what it should be.
Point two - Cipla says that they are introducing the new drug for Indian patients. I doubt this. They are doing it to make money. Like I said before, the material cost in such cases is less than 1% of the sale price. Since Cipla has not done the basic R&D for the product they would be making a huge profit on the drug. They do not have any other major fixed cost to recover. If they were really interested in 'serving' the Indian patients, they could have offered it at a 10% or 50% margin over the material cost. This they will surely not do.
Thursday, April 1, 2010
'Profit' from a store?
There is news in today's Economic times that Aditya Birla Retail MORE have closed 39 of their stores in Gujarat. This is one third of their stores in Gujarat. The reason was that the stores were not making money. Have a look at the complete article:
http://economictimes.indiatimes.com/articleshow/5748697.cms
Calculating the 'profit' from an individual store is difficult. How do you attribute costs of a delivery vehicle serving five stores in one locality. Closing one store is not going to reduce the logistics costs by 20%. Similarly the costs of the central buying team, and the CEO is not proportional to the number of stores. Thus, if the decision has been taken using traditional costing, I think it would be a blunder. It is incremental cost that matters here.
While costs are not proportional to the number of stores, unfortunately sales is. When stores are shut, sales will definitely go down in direct proportion. It is only the lease and the local manpower costs that would come down. The costs of expensive expat CEOs and the central organisation overheads would stay. Sometimes the drop in sales could be higher than the drop in store level variable costs and put the company in deeper problems.
Stores have been opened without detailed analysis based on some global ballpark figure. This was the first wrong step. Every retailer opened multiple formats. The second wrong step. Now, with cash crunch they are closing the stores recklessly, the third wrong step. My take: If a retail group is sinking, shutting a few shops is not going to help, yes the inevitable could be delayed a little.
http://economictimes.indiatimes.com/articleshow/5748697.cms
Calculating the 'profit' from an individual store is difficult. How do you attribute costs of a delivery vehicle serving five stores in one locality. Closing one store is not going to reduce the logistics costs by 20%. Similarly the costs of the central buying team, and the CEO is not proportional to the number of stores. Thus, if the decision has been taken using traditional costing, I think it would be a blunder. It is incremental cost that matters here.
While costs are not proportional to the number of stores, unfortunately sales is. When stores are shut, sales will definitely go down in direct proportion. It is only the lease and the local manpower costs that would come down. The costs of expensive expat CEOs and the central organisation overheads would stay. Sometimes the drop in sales could be higher than the drop in store level variable costs and put the company in deeper problems.
Stores have been opened without detailed analysis based on some global ballpark figure. This was the first wrong step. Every retailer opened multiple formats. The second wrong step. Now, with cash crunch they are closing the stores recklessly, the third wrong step. My take: If a retail group is sinking, shutting a few shops is not going to help, yes the inevitable could be delayed a little.
Monday, March 8, 2010
Hawthorne Effect
In between 1924 and 1932, experiments were conducted in a factory to study the effect of parameters like illumination, work breaks, work day length and salary / incentives on productivity. When illumination was increased for a test group the productivity increased. However when the illumination was decreased the productivity did not go down. The researchers concluded that the change of productivity was because the operators in the test group felt motivated that they were being 'special' and that Management was 'interested' in their work.
http://en.wikipedia.org/wiki/Hawthorne_effect
You can see the above link in Wikipedia to know more.
I came across an interesting experiment, have a look, it is a six minute video on youtube.
http://www.youtube.com/watch?v=b_YAJtJmPLE
When people crossing the road were informed that jaywalking was not the right thing, a good number of people avoided it. It is a good experiment worth spending your six minutes on.
The larger concept is that people need to be told and retold what they are supposed to do. And, they need to know that their performance is being monitored. Just doing this will ensure that a good majority of employees will adhere to the processes in the short term at least. Even if we have it in our SOPs we need to keep re enforcing the message to the process owners / process executioners again and again. They need to be told that it is important that they follow the process. With 80% of your employees or subordinates getting in line, your job will be reduced to monitoring the remaining 20%.
Over a long term of course this may not work. A house with a sign "Beware Dangerous Dog" will surely keep away people for a while. But, if a bark is never heard, I am sure there will be people who will take a chance. For long term process adherence, we actually need to incentivise individuals according to the degree to which processes are being followed by them.
http://en.wikipedia.org/wiki/Hawthorne_effect
You can see the above link in Wikipedia to know more.
I came across an interesting experiment, have a look, it is a six minute video on youtube.
http://www.youtube.com/watch?v=b_YAJtJmPLE
When people crossing the road were informed that jaywalking was not the right thing, a good number of people avoided it. It is a good experiment worth spending your six minutes on.
The larger concept is that people need to be told and retold what they are supposed to do. And, they need to know that their performance is being monitored. Just doing this will ensure that a good majority of employees will adhere to the processes in the short term at least. Even if we have it in our SOPs we need to keep re enforcing the message to the process owners / process executioners again and again. They need to be told that it is important that they follow the process. With 80% of your employees or subordinates getting in line, your job will be reduced to monitoring the remaining 20%.
Over a long term of course this may not work. A house with a sign "Beware Dangerous Dog" will surely keep away people for a while. But, if a bark is never heard, I am sure there will be people who will take a chance. For long term process adherence, we actually need to incentivise individuals according to the degree to which processes are being followed by them.
Saturday, March 6, 2010
Green Scams
For all my support to the issue of going 'Green' I think that companies are taking us for a ride. Projects that plan a saving of a few million metric tons of green house gases are common in newspapers. This is then linked to the equivalent of removing a few million cars from the road. I think we sum up all the gases the benevolent companies will save, by 2015 we might go into a negative, where we are actually sucking back some carbon emitted in earlier years!!
The first suspect is the method the firms use to calculate and project the savings. A company could project a 50% increase of business in the next few years. Accordingly they could extrapolate the emission to an increase of 50%. They could then show a petty saving on this extrapolated amount.
next, as a learned friend pointed out, is the concept of net pollution reduction versus the gross reduction. Electric cars are not totally pollution free. Electricity generation is polluting and the lead acetate batteries are dangerous to dispose. So the pollution from increased generation of electricity and the disposal of batteries has to be subtracted from the gross savings of vehicular emission. I believe that when stating reduction targets, instead of informing the net savings, companies are giving the gross savings value. This could be substantially higher than the real savings achieved.
Like pointed out in the previous post, some savings could be merely shifting of activities to vendors. While the company has reduced emission, there are no supply chain wide cuts. Such activities might in fact increase the transportation and hence the net carbon emissions.
I have always maintained that a cigarette smoker giving up the habit definitely benefits the environment. But, the bigger benefit is to himself. He would probably add a few more years to his life, and it is impossible to calculate the cost benefit of this act.
The first suspect is the method the firms use to calculate and project the savings. A company could project a 50% increase of business in the next few years. Accordingly they could extrapolate the emission to an increase of 50%. They could then show a petty saving on this extrapolated amount.
next, as a learned friend pointed out, is the concept of net pollution reduction versus the gross reduction. Electric cars are not totally pollution free. Electricity generation is polluting and the lead acetate batteries are dangerous to dispose. So the pollution from increased generation of electricity and the disposal of batteries has to be subtracted from the gross savings of vehicular emission. I believe that when stating reduction targets, instead of informing the net savings, companies are giving the gross savings value. This could be substantially higher than the real savings achieved.
Like pointed out in the previous post, some savings could be merely shifting of activities to vendors. While the company has reduced emission, there are no supply chain wide cuts. Such activities might in fact increase the transportation and hence the net carbon emissions.
I have always maintained that a cigarette smoker giving up the habit definitely benefits the environment. But, the bigger benefit is to himself. He would probably add a few more years to his life, and it is impossible to calculate the cost benefit of this act.
Monday, February 22, 2010
Environment Management Systems
Multinational companies (MNC) engaged in electroplating processes in India outsourced them. Instead of doing it themselves, they had other smaller firms do it. The reason being that electroplating was a very polluting process. The organisations would not be able to seek ISO 14000 and other environment certifications. With vendors indulging in polluting processes would not impact in the certification of the organisation. The rights and wrongs of this could be an issue of another post.
One electroplating vendor installed additional equipment to neutralize the effluents from his unit. He hoped that since he himself had an environment friendly process, he would be a preferred choice for MNCs. These very companies in the United States and Europe were bragging the virtues of environmentally friendly practices in many conferences. The vendor was disappointed as no firm, neither MNC nor Indian, was willing to pay extra for environmentally friendly electroplating.
Two points here - industry leaders would follow 'green' norms only if their survival was directly threatened or because of government norms. To expect businesses to voluntarily take up such practices would be a case that is not supported by history. The pressure to achieve immediate bottom line results is far too immense.
Second, environmentally sound practices currently are like the end of the line inspection policies of early 1940s. Manufacturing plant would make the products and the Quality inspectors would assess the finished products. That a product is 'bad' would not be known till it comes to the very end of the assembly line.
Gurus like Deming and Juran had an emphasis on Total Quality that would avoid poor quality products. Feigenbaum's concept of cost of Prevention was supposed to overall reduce the cost of Appraisal and the cost of Rejection. They were in favour of ensuring that poor quality does not happen rather than correct a defective product.
Gurus like Deming and Juran had an emphasis on Total Quality that would avoid poor quality products. Feigenbaum's concept of cost of Prevention was supposed to overall reduce the cost of Appraisal and the cost of Rejection. They were in favour of ensuring that poor quality does not happen rather than correct a defective product.
This is the revolution we need in environmentally safe practices. Instead of developing a better scrubber technology that removes sulphur and other pollutants from flue gases, coal could be processed at mines to make it 'cleaner'. Every step of the manufacturing process has to be green. This should be a part of the plant design. On a short term, the costs might seem to go up, but over a period of time, they would always come down. So, our electroplating vendor needs to set up a smart system that is clean and does not increase the cost.
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