Operations everything

Is it really the Kirana?

2011-04-22T21:47:00.000-07:00

Foreign FDI has been blocked in multi brand retail on the pretext of protecting the small kirana (mom and pop) stores. Sometimes I wonder if this is the real reason. I strongly believe that the restriction is actually to help the large Indian organised retailers. They are the ones to be first affected by the direct entry of Wal-Marts and Tescos of the world in retailing.

The typical design of the large foreign retailers is that they have a very strong but investment intensive back end. In order to get good returns from their investments, the stores have to be necessarily large formats. In addition, in one given market there have to be a high number of stores.

The high lease rates in urban areas of India make it impossible for retailers to have many large stores inside the city. The Wal-Mart model of having the store outside the city would be difficult given the traffic and road infrastructure bottlenecks. In rural areas the scale of operations is generally very low. Indians typically do not have a spend oriented culture like the Americans. So, it would be difficult for a retailer to set up and sustain a large store in a Tier 3 city.

The kirana stores in India have created a very low cost selling model. A pan shop could sustain itself at a monthly profit of around Rs. 5000 only. This number could be much lower in rural areas. This was not the case in the USA. These players can never be threatened by the foreign retailers. The existing so called organised retailers in India would probably have the most to lose.

Indian organised retailers are still in an experimentation mode. They hastily set up the front end and are now trying to make the back end work. Most have poor systems. Some companies have closed down and most of the rest are not making money. They have tried to copy the IT systems in foreign retail as this can be easily bought. But, the human systems and discipline needed are sadly missing.

By getting the government of India to form rules banning the foreign retailers, the organised players seem to be creating space for themselves. Foreign companies wanting to enter India would be forced to tie with the existing Indian players. It clearly seems that the rule has been created in the first place to benefit these large Indian retail players.

Now suddenly there is a talk about relaxing the rule. Nothing has changed for the small kirana owner. But all the large format foreign retailers have already been subdued to partnerships with large Indian firms – this includes Wal-Mart, Tesco, Woolworths, etc. Having done this, and needing more investments, it seems that the large Indian players are now getting the government to allow more direct investment in multi brand retail.

of Margins, Profits and Collaboration

2011-03-11T11:14:00.000-08:00

A manufacturer needs a retail store to sell its products. And, a retail store needs a good agile manufacturer. While this is common knowledge, supply chain practice tends to suggest otherwise. Look at this article in Economic Times:

http://lite.epaper.timesofindia.com/mobile.aspx?article=yes&pageid=1&sectid=edid=&edlabel=ETD&mydateHid=11-03-2011&pubname=Economic+Times+-+Delhi&edname=&articleid=Ar00100&publabel=ET

The Electronic retailers want the manufacturers to raise the margins by 4% from the current 8 -10%. The manufacturers say that the organised retailers give them a lower throughput than the smaller mom and pop stores and hence they can't increase the margins for modern trade.

Gross margin is defined as the buying cost subtracted from the selling price. For all practical purpose, this number is very different from profits. A high margin product can be a net loss product and a super low margin product can be a profitable item.

There is the issue of overheads here. Traders who work on volume products on low margins strive to keep overheads low. This way they can ensure good profits even with gross margins of around 2 - 5% only. For some MNCs on the other hand, profits are not even 10% of the gross margins. MNCs have an expensive bureaucracy to support and pay salaries to. Point that I am trying to make is that increasing margins is not the only way to make more profits.

A vendor who is unreliable would need lot of followups. This follow up is done by a buyer, and this buyer gets her salary from the buying organisation. So, a low cost vendor might actually be a loss making proposition. A bad quality product or a wrong shipment can surely be returned to a vendor. The vendor may also give a 100% credit note against the returns. But, the time lost in creating this return journey is a cost to the buyer. Similarly, a customer who demands frequent deliveries or who keeps changing order commitments is surely more expensive than a customer who lifts material in higher quantity, has lesser frequency of replenishment and also who give stable orders.

Instead of haggling on margins, the electronic manufacturers and the retailers could sit together and analyse these very cost drivers. In a truly modern sense, the modern trade must give up the aggressive postures and come to the negotiating table. Together with the manufacturers, maybe they could work out arrangements of last mile delivery to the consumers homes or offer special after sales service deals.

Same for manufacturing companies. An electronics company has significantly greater efforts in selling to smaller stores than large format chain retailers. Pan country buying decisions are probably made from one office for large format retailers. For smaller mom and pop stores, every small store would need a sales executive from the manufacturing firm visiting every week. The savings in sales effort costs would easily more than make up for the lower throughout in the organised retail.

The key would be for one party to demonstrate maturity and initiate the process. This is not a zero sum game where one firm has to lose for the other to win. There are numerous cost drivers besides the basic price. There can be a truly win win solution here. It is not a fight of the retailer versus the manufacturer. It is actually a relay race where both players have to work together to capture and satisfy the end customer.

2011-02-03T06:49:00.000-08:00

Not all customers are equal. Some customers are extremely expensive to serve. Profit for a company is not the direct price of the product minus the cost. There are many overhead expenses. And these overhead expenses are not shared uniformly over every customer.

For a trucking firm, a customer with uniform orders is less expensive to serve than one with sporadic requirements. Few large orders are easier to pick and dispatch rather than many small orders. For an automobile dealership, a flexible customer who buys the vehicle available in the showroom is more profitable than a customer who takes a long time to decide or one who needs a specific configuration.

In spite of this knowledge in most cases we generally charge the same price to all customers. The differential supply chain cost is rarely considered. While in cases there may be some differential in the price, it is rarely calculated from the cost of actually serving a customer. Marketing segments customers according to channels, need of service, etc. Costing segregates costs of every resource and every product. No function looks at cost of serving customers and then creating differential pricing.

Meru cabs is a provider for taxi services in Mumbai, Delhi and a few other Indian cities. Customers who book cabs by using a call centre are billed a convenience charge of Rs. 50 extra. Customers who book online are spared of this cost. The Rs. 50 is clearly an approximate cost for the additional services the customer uses.

Every business needs to think about this idea. By creating differential pricing, businesses can actually direct customers towards specific services. If a customer knows that by placing orders in a certain manner he may get a better rate, the customer might change her behaviour.

With a uniform pricing policy, good customers may feel cheated. In spite of being low cost customers they pay as much as other customers. There is a definite danger of such customers changing vendors. In the end, the business will be saddled with high proportion of high cost customers.

Differential pricing can be created on the basis of various basis. It can be the number of orders, quantity per order, consistency of business, number of delivery locations, number of product variants asked for, etc. Every business will have its own dynamics and the pricing has to be configured accordingly. The aim is to reward good customers and also to motivate other customers to migrate to better relationship pattern. Of course, the ultimate aim is to make doing business easier and more profitable.

measure outcomes or the means?

2010-10-07T00:19:00.000-07:00

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.

Is being Green a luxury?

2010-09-04T22:20:00.000-07:00

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.

Fun theory

2010-08-05T21:08:00.001-07:00

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.

Bottom of the pyramid employees

2010-07-23T22:41:00.000-07:00

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.

Growth through capacity

2010-07-13T02:07:00.000-07:00

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.

Profits from expansion

2010-07-04T12:40:00.000-07:00

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.

Vendor Capacity Planning

2010-06-16T20:39:00.000-07:00

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.

Maintenance budgeting

2010-05-15T07:26:00.000-07:00

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.

Dell to ship by sea

2010-04-28T04:14:00.000-07:00

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.

takes a thief to nail another

2010-04-09T20:46:00.001-07:00

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 have 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 2 - 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.

'Profit' from a store?

2010-03-31T21:19:00.000-07:00

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.

Hawthorne Effect

2010-03-08T02:53:00.000-08:00

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.

Green Scams

2010-03-06T04:01:00.001-08:00

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.

Environment Management Systems

2010-02-22T03:51:00.000-08:00

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.

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.

'You' have become the most prized asset for firms

2009-12-29T11:25:00.000-08:00

This is the headline of an article in the Mumbai edition of Economic times, 29th Dec 2009, page 8. Companies like Google, Yahoo!, DoCoMo, Lays, Kurkure, etc. are trying to involve the customers in designing the product. Early involvement of customers is supposed to 'hook' them. It becomes easier to get more customers and retain the existing ones by giving them the exact product that they want.

The only issue in doing this is the lead time from the time the customer expresses the desire to have the product to the time when she actually has it. High lead times could offset all the gains of giving a highly customised product. While a customer would love a personalised product, she might hate to wait to receive it. The key would be speed up the product / service delivery process and make it seem 'fun'.

It is close to impossible to allow the customers to completely design the products they want from scratch. 'Modularisation' works out here. As Yahoo!, I allow my customers to use certain modules on their home page, allow them to locate it on the home page and then probably configure a background. This is exactly how a Volkswagen Beetle is custom designed. Again, exactly how a Boeing Jumbo is made specifically for an airline company.

Manufacturing skill development

2009-12-22T07:11:00.000-08:00

Check this article

http://blog.seattlepi.com/gettowork/archives/188875.asp

All major factories for industrial tooling have closed down in the United States. Now, obviously with no demand of technicians, the technical schools offering these trades would close down also. So in a way the complete supply chain of a particular skill type would come to a halt. This is a huge risk as restarting this supply chain would be very very difficult.

At a business level, we routinely keep at least two vendors alive for most items. It is a risk management strategy. Surprisingly this fact seems to have been ignored at the national level. Countries spend billions of dollars in creating oil reservoirs to de risk oil shortages. I guess somewhere a similar investment is needed to ensure the basic level of technical skill. The risk of losing out on these skills is just too high.

The Chicken and egg story in Logistics

2009-12-15T03:41:00.000-08:00

What come first - setting up a good logistics network and then starting the business or starting the business and then setting up a logistics network to support the requirements that crop up? A lay man answer would be to say 'business' comes first. But sometimes the cost of such rear guard action may be prohibitive and in fact cause the business to shut shop.

The US government committed additional combat troops to Afghanistan. As per a report in today's Wall Street journal, the supplies necessary for this deployment are just not here. The building material (concrete blocks - to be procured from Pakistan), fuel (Afghanistan is land locked) and blast resistant trucks ( to be imported from US) have all to reach Afghanistan before the troops actually arrive.

I am not questioning if the troops should be sent or not. Obama already has a Nobel prize for peace so I will keep my personal views away from this. The issue is of planning the logistics and sequencing the deployment of troops in sync with logistics deployment. We certainly not want troops to be in war zone without the necessary equipment and logistics support.

It is easy to take a 'consultant' position and advice the armed forces. In our businesses however the logistics side of business is totally ignored. The modern trade in India has set up retail shops and are now, at a much later stage, thinking of logistics optimisation. New products are being designed without too much thinking of the increase in component SKUs and thee corresponding affect on inventory related costs.

It is a simple proposition that I am trying to put forward - Business requirements have to be met. There is no question of this. This, however can not be done at the cost of ignoring the constraints of logistics. For every step of business growth and change, the corresponding logistics resources should be planned also. And, this logistics planning must be done in the same forum that does the business planning and not by a department head.

Adidas shifting NBA jerseys out of USA

2009-11-30T20:19:00.000-08:00

Adidas is planning to move the manufacturing of NBA jerseys from American Classic Outfitter (ACO)- a firm based in Wyoming, USA to Thailand. Check this article here

http://buffalo.bizjournals.com/buffalo/stories/2009/11/30/daily4.html

There are a number of issues here. First is the Adidas side of the story. NBA happens every year and unlike the Soccer world cup, the uniforms do not change very often. Though every year some new stars are created, the older players definitely do their job. The point of the two sentences is that the demand for the jerseys is more or less stable and obsolescence low. Given these parameters, outsourcing to Thailand would definitely make a lot of sense. "Moving manufacturing closer to the source of raw materials", as Adidas says, surely makes sense.

Adidas plans to continue making jerseys for college and amateur teams in the United States. Given the unstable demand in this sector, again this makes sense. However an increasing price differential between the US and Thailand (plus the cost of transporting bulky raw material instead of finished goods), Adidas may be forced to revisit this decision also.

Another issue is the statement that Adidas had promised ACO a five year deal based on which ACO had invested USD 1 million in new machines. At this point it would be difficult to say if this was true. It could be a political hype being created to force Adidas to reverse its decision.

In case it is true, it is again not something that has never been done. Companies are known to treat their vendors with disdain. Buyers of large firms limit their reach to the sales personnel of the vendors. Contracts are short term and the changes in schedules are high. While this may reduce the 'price' the firm pays its vendors, the 'cost' incurred by the vendor increases. The vendor has to compensate the drop in his profits. This is where the the vendor may resort to means that are not exactly ethical. He / she would definitely cut service levels to the customers in some form.

In some cases it is very easy for the buyer to shift vendors, but relatively difficult for the vendors to find new buyers. If the vendors in such cases do not have long term contracts they try to recover all their costs of capital and process changes in the first period of the contract. this would mean substantially higher prices for the buyer.

The message here is very simple. Toyota has been doing this for ages. The point is in continuation to my last post. Resorting to pressure tactics and changing vendors may create a mirage of reducing prices. However the increase of cost is sure to reflect somewhere. Unreliability (meaning increased inventory and lost capacity) and the increased firefighting efforts that we see in our firms are a reflection of these very unhealthy practices that we are following.

Logistics cost reduction

2009-11-28T02:26:00.001-08:00

Logistics cost is generally around 4 - 10% of the total product cost in most manufacturing firms. Of this amount 60% to 80% is fuel cost. There are of course also the costs of the driver, cleaner and the vehicle fixed costs. The numbers make it clear that any reduction of logistics cost by further squeezing the Logistics service providers (LSPs) would clearly not be a feasible option. Yet this is the most common means of cost reduction resorted to.

Faced with such pressures, the reliability of LSPs becomes suspect. The LSPs may offer 'bargain' prices to garner initial business but such 'bargain' business often becomes low priority work. LSPs bundle loads of other customers with the load of the contracted customer. This forces them to make unnecessary detours and stops. For the customer, using such low cost resource invariably results in either inventory buildup or lost capacity.

All this is not rocket science. Yet most companies do not seem to see and realise this. One reason is of course the heavily fortified 'departments' that do not communicate with each other. The KRAs are generally designed to create local optimums. A logistics department with minimum cost may have a star status - that it create problems for other departments is a different issue.

Logistics cost is a direct out of pocket expense that is 'seen' by the entire firm. Inventory costs, obsolescence, cost of lost capacity and cost of expedited delivery are never a part of financial statements. They are thus ignored. There is a tremendous scope of improvement here. But the scope is not in reducing logistics cost. It is in reducing the total supply chain costs and in increasing sales.

Maturing of Indian organised retail

2009-10-26T02:27:00.000-07:00

Check this article from Business World, its about Spencer's retail and their efforts to survive (and then probably thrive). The article has impressive numbers and graphs about Indian retail scenario.

http://www.rpggroup.com/images/News/shopping_bw_5_10_09.pdf

The most important point for me is that Spencer's will be shutting down three formats and focus on hypermarket and supermarket. I believe this is a very very smart move. The so called organised players of Indian retail have chosen to dabble in all formats simultaneously. Every format served a different customer but they were served by the same supply chain. This was a sure way to ensure dissatisfied customers and high operating costs.

A small store like Spencer's Express or Spinach needs frequent deliveries and in small quantities. Every delivery assortment would have different types of items. However, A large format Big Bazaar could easily store and accept deliveries of full truck loads. Every aspect of inventory planning and distribution would be different. We cannot expect the same supply chain to serve both needs.

It is good to see that Spencer's has seen the light. Am sure with the realisation that the fabled growth of Indian (so called) organised retail not happening, others have no option but to join in.

Promotions and change of jobs

2009-10-21T05:41:00.000-07:00

Two incidents -

In a faculty meeting at NMIMS we were waiting for the tea to be served. The person manning the tea arrangements outside refused to serve us as he was the 'supervisor' and person supposed to serve tea had gone down.

At a Pizza Hut outlet at Borivali, peak time, the staff were trying to clear and re arrange tables as fast as they could. There was a rush of customers waiting outside. As soon as the table next to us became empty, the supervisor started collecting the tissues strewn on the table. Till the waiter arrived a lot of the table was clean. Both of them together cleared and cleaned the table.

I am sure all of us can take our own lessons. Job roles in processes are sometimes defined very narrowly. The definitions are also internally oriented and have nothing to do with the customer. Internally oriented job roles may lead to some hypothetical efficiency calculation, but they may be detrimental to customer service.

I am not looking at criticizing individuals. Of course a point could also be made that the faculty could have taken tea on their own. An employee behaves in a manner that is defined in his job role. In an era of less competition job roles and processes defined to create high efficiencies were okay, but in the current competitive scenario they are a sure way to ruin.

Clean technologies - CSR or business?

2009-10-18T20:06:00.000-07:00

I was invited to take a session at an small MBA institute in Gujarat. I had given then a few pages of reading material. I saw that the institute had edited the layout of my material so that it fit in only four pages and printed it on both sides of the paper. I began my session by appreciating the editing that saved lot of paper, an environmentally conscious action. A student stood up to reply that she was responsible for this and her prime motivation was to save money. Printing on both sides was obviously cheaper than two sheets with one side printed.

This incident reemphasized my concern that we had a wrong approach to clean technologies and sustainable environment based practices. Many companies had a special department that looked at these initiatives and these were paraded to the world as CSR (Corporate Social responsibility) initiatives. Firms used such actions to occupy high moral ground among consumers and the society.

A better way to look at these initiatives would be to assess them as normal business projects. They would have an investment and a straight monetary return. This would be the only way to ensure that the projects are taken up willingly by many companies. Businesses should be convinced that clean technologies save money and that they save the environment is a by product.

try forecasting this

2009-09-26T02:34:00.000-07:00

In the 1976 edition of the Sunday league, the last playing day had three matches scheduled. The winner of the league would be decided only after all three matches were over. The problem was that there was only one trophy and it had to be given to the winner immediately after the match. All the three grounds (Cardiff, Edgbaston and Maidstone) were approximately 200 kms from each other.

BBC, the sponsor, hired a helicopter, and kept the trophy at their Birmingham studio and very close to Edgbaston. They decided to fly the trophy to Cardiff but changed plans and sent it to Maidstone. In a thrilling game, that went to the last ball, Somerset lost at Cardiff and the winner was Kent at Maidstone.

Read here for the complete article:

http://www.cricinfo.com/magazine/content/story/426659.html

Luckily, BBC's decision to send the trophy to Kent turned out to be right. Read the previous sentence again - the reason for the right decision was 'luck.' The last ball could easily have nicked to the third man for four runs and Somerset would have been the winner. They would then have to wait for almost 3 hours to get the trophy back from Maidstone. It could very well been a disastrous decision. Cricket experts would have surely written reports of how BBC should have sent the trophy to Cardiff and not to Maidstone.

In business, we face so many situations like this everyday. Every decision has some assumptions. If those assumptions come true the decision is hailed. If the decision does not come true, academicians like me will write a case study on how 'elementary business principles' had been violated.

I have always taught forecasting from a premise that it could always and easily go wrong. Investing in good forecasting systems is good, but effort also should be invested in creating agile systems that can survive inaccurate forecasts. We must never forget that most forecasting methods, whether time series of regression based have an inherent assumption that the past will repeat itself. Given the dynamic nature of markets, I am not sure if this is a valid suggestion.

And, at the end of the day its okay for forecasts to wrong. We could create a tracking signal and so long as the variation is within limits we should be okay. So, should the forecasting method be reviewed if the tracking signal is violated? As a good academician I will leave this question with a simple answer - "It depends".

One more thing, what would you do if you had to take the trophy decision in 1976.
1. Would you have housed the trophy in Edgbaston?
2. Would you have directed the helicopter to Maidstone on the basis of gut feel?
3. Do you have a third out of the box solution?

one more JIT

2009-08-25T05:23:00.000-07:00

Fiat Spa. has taken over the management of Chrysler. Fiat is implementing JIT - the system they have at Toyota, at Chrysler. So now, there will be larger teams, less supervisors, error eradication at source, and lots of other things. Check this article here -

http://www.detnews.com/article/20090824/AUTO01/908240334/Fiat-takes-aim-at-waste-in-Chrysler-plant-overhauls

I can bet that this will be a grand failure. It is understandable that Fiat had to start with a bang. They had to show that they are doing something different. This was the only way they could have generated some hope of survival.

Toyota Production System or JIT or Lean, needs willing cooperation from the workers. The system needs everyone in the company to be convinced of the way ahead. Only then can the changes succeed. Pushing in the JIT based changes create a hollow system. Lot of posters are put on the walls, new jargons introduced, but nothing substantial changes.

It is not to say that Chrysler can't be made profitable. There are always many different philosophies. Lean is not the only way to run a company. The only problem is that if Lean is to be implemented then the complete package needs to be spread out. Using just the tools, without introducing the culture can never work. Forcing the people to wear uniforms and keep just one bottle of water at work stations is definitely not how Lean should start.

Cash for clunkers

2009-08-25T04:28:00.000-07:00

It is not necessary that you make good products. It is however necessary that you can get the government to issue some policy that favours the sale of your product. I have never understood the tax breaks for home loans in India. Most of these loans have been used in urban areas and urbanisation in the already massively infested cities is not at all desirable. If construction industry is necessary for the economy, so is automobiles and every other sector.

One thing that I am happy to note is that this situation is not limited to India. Check this link on "Cash for clunkers program" sponsored by the US government.

http://agmetalminer.com/2009/08/24/cash-for-clunkers-has-burned-through-3b-what-now/

It seems that if a polluting car is exchanged for a less polluting version, the government gives the buyer a certain subsidy. This scheme has caught on and the sales of the automobiles are zooming up. There are three parties here - mother earth (pollution), the automakers and the government.

1. As technology matures, any average new car is better than an old car. So any average person wanting to exchange would be eligible for subsidy.
2. A low pollution car that is being used is more polluting than an old car that is not being used.
3. Car sales now, in this poor economy, may cause future sales to plummet
4. Subsidy money may cause huge deficit to the government

So, who benefits? Everyone seems to lose.

..And this is how SCM does not work

2009-08-12T05:12:00.000-07:00

" Indian organised retail is more unorganised than the unorganised retail." I love this statement. and though it may seem shocking it is 100% true. The retail industry has seen reckless expansion. The players have multiple formats of stores and are trying to sell everything to everyone. This goes against the basic tenets of sound SCM. That the organised retail industry in India is not making money is not at all a surprise.

In order to survive from their own wayward ways, the retailers are indulging in further senseless activities. Have a look at this article -
http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRELzIwMDkvMDgvMTAjQXIwMDEwMA==&Mode=HTML&Locale=english-skin-custom

Of course good capacity utilisation is good. And yes, selling more private labels also help. This will of course save a few crore rupees for everyone. But, was this really part of the problem? The problem with the organised retailers is a top heavy structure (super high man power costs) and a knee jerk reaction based supply chain design. None of these factors are getting addressed by the actions the article suggests. Small savings are not going to save the ship from sinking.

Indian retail industry had a golden chance. They could have used all the learnings of the American and European retail industry, coupled it with local knowledge and avoided the growth pangs. But they seemed to have ignored everything. They started with a bank with an inadequate infrastructure and an ill trained staff. Instead of first creating the systems, the retailers progressed with short cuts. With such management bad results are definite.

This is how SCM works

2009-08-10T05:45:00.000-07:00

With the prices of Oil flowing down, the refineries have reduced their output. Reliance in India is a major refinery that has also taken a massive cut. They use chlorine as part of their process. Reduction of refining has meant a reduced demand for chlorine. A huge quantity of chlorine that would otherwise be used up in the refining process was thus diverted to the open market.

With an excess of chlorine in the open market the prices of chlorine went down. In order to control the prices, the manufacturers of chlorine reduced their production. This is a simple standard story till here. Chlorine manufacturing has a by product - caustic soda. This is used by a lot of industries to make many other products. With reduced chlorine production, the caustic production also reduced. However the caustic demand was still the same. This caused the caustic price to jump up.

Thus while we have oil prices coming down, the prices of caustic products and its allied industries have gone up. Every product in the supply chain has some connections and not every connection is direct. Complicated relationships may cause surpirsing behaviour in the movement of prices of seemingly unrelated commodities.

Profit from manufacturing knowledge

2009-08-10T05:21:00.000-07:00

The Boeing Co is planning to invest in India - in the form of research centres and manufacturing of spares by tying up with firms like L&T etc. They are doing this to target the defence and commercial aerospace market here. Look at this story in Business Standard - http://www.business-standard.com/india/news/boeing-to-replicate-us-business-structure-in-india/366477/

There are three straight plausible reasons -
1. It could seem to be a magnanimous act of a company developing local businesses.
2. Strengthening its appeal (to sell in India) by having local Indian partners
3. Preempting laws that would force local partnerships for such large contracts.

I believe there is a larger business sense in this. Ideally all manufacturing should be as localised as possible. There is no point of Indian iron ore being shipped to Japan and US and then returning to this country in the form of turbines. More so when it is know that heavy engineering items do not enjoy the economies of increasing the scale of production. And, still more so when it is known that there is a heavy variation in the specific nature of these goods produced.

Instead of producing it themselves companies like Boeing could tie up with local companies. Boeing here would not earn from manufacturing, but would earn a substantial revenue from their knowledge sharing. Per unit, this contribution (= unit sales price - unit variable costs) could be lesser than if they could have shipped the product from United States. But making in the local country would reduce costs (and price), substantially increase the demand and the resulting total contribution would be significantly higher.

The waste of intercontinental transportation would be totally avoided. That the company gets a better image as a responsible player (employing local citizens), etc. would be a very good and desirable by-product!!

New auto factories?

2009-07-30T01:51:00.001-07:00

This is a clear proof that financial heads still rule the automobile companies. They have been very successful in taking their companies' towards financial disasters and have not seemed to have learnt anything out of it. Check this link

http://online.wsj.com/article/SB124884028240989277.html?mod=googlenews_wsj#articleTabs%3Darticle

In spite of the existing recession and the low capacity utilisation of the auto industry, Honda and Nissan have announced setting up of new plants in China. The article says that they are doing this to end the slump. Wow! Ever heard a dietitian tell her obese client to eat more? That is what is exactly happening here. Logically the move makes no sense. But finance has nothing to do with logic.

The way I see it, setting up new plants in China to sell cars in China will impact the transportation costs. Instead of importing vehicles from Japan or any other part of the world, the cars can be made and sold locally. They would also benefit from the low labour rates in China. Wonderful - the cost per car comes down. But, what about the capital cost of setting up the new plant? Well, that could very easily be engineered to reflect as depreciation at a low level. This way, the Chinese venture would easily show profits. And the existing plants? Again, the finance wizards are sure to have done something here also. They would probably defer the depreciation for the existing plants or hive them off as a separate company and ensure that the parent company 'shows' profits.

The first thing that makes me sad is that banks do not seem to realise this game. They seem to merely look at ratios and freely lend to companies. So, an over leveraged company can easily pass of its debts to another subsidiary and present themselves to banks for new loans. And, most of these companies do get the new loans they had applied for.

The worse thing is that the manufacturing companies themselves do not recognise their follies. Sometime everything is going to catch up. The recession is here and nothing has happened to make it go away. Some people never seem to learn.

Cheaper way to get energy efficiency

2009-07-30T01:36:00.000-07:00

Energy efficient processes have for long been peddled as expensive applications with high pay back periods. The manufacturers of such devices have always lobbied for government support in the form of lower taxes and support. They would then devious devious spreadsheets and use novel jargons to justify and promote their products. Somewhere this is what has prevented these manufacturers from making their products mass based.

Check this link

http://www.fastcompany.com/blog/ariel-schwartz/sustainability/clayton-homes-brings-energy-efficiency-modular-design-multi-famil

A company is designing new homes that are supposed to be energy efficient. They would save the user around USD 40 per year in terms of energy costs. Most important part, they are also cheaper than the regular homes.

This is what the energy efficient products should be. Their capital cost should be at least equal, if not lower than the regular products they seek to replace. That is the only way they are ever going to build up some mass appeal. Rather than using 'clean energy' as a marketing pull they should use the plain simple total cost of ownership concept.

Toyota closing the NUMMI plant

2009-07-26T05:54:00.000-07:00

It seems that after the pull out of GM, Toyota is considering 'closing' the NUMMI plant. See the link.

http://www.nytimes.com/2009/07/25/business/global/25toyota.html?_r=1&hpw

The article says it all actually. Workers have willingly given suggestions because they have been guaranteed jobs. And when one facility is closed the motivation in others is surely going to take a hit.

My take is that there is something more than what is in print in this case. I still feel that Toyota can definitely bear the loss making plant for around a year at least. May be this is a ploy to get the unionised workers to the bargaining table. Maybe it could be to prompt the government to dole out sops.

That the plant was a joint venture with GM, and it survived so long is itself a surprise in a way. GM and Toyota have totally different cultures. Now with GM gone, Toyota should have been very happy. So, this announcement of 'closing' comes as a surprise. Somehow I cannot see this happening. We can wait and watch, the drama should climax soon.

How the growth comes

2009-05-10T20:08:00.000-07:00

Growth actually comes only when the consumers buy more products. With the population increasing at a steady rate, higher rate of money growth ensures that people buy more. It is this increased propensity to consume that creates overall growth. We would need more electricity, more turbines and more mining. So, if the consumer spend does not increase, and assuming that there is no existing unfulfilled demand, any other indicator measuring industrial growth would be pure a pure illusion.

Check this link -
http://www.hindu.com/2009/05/10/stories/2009051055611400.htm
In a survey conducted by CII for March April 2009, they have said that there is a slight improvement in the manufacturing sector. They have created some categories like negative, moderate and high growth and have said that most of the sectors have inched up in the March April period.

For first, the measures of classifying industries in the three segments have not been specified. I am sure that the survey must have had some measures, but the CII press release or the reporter, assuming a reader of limited intelligence, spared him of details. That these details would have allowed him to make his own unbiased judgement is a different story.

Inn many cases many surveys with an aim of proving growth. Their aim is of course something very noble - maybe to lead to an increase in the sentiment. They use, abuse and twist standard measurements to prove the hypothesis that they had started with. This is a major reason to give categorical data and avoid specifying the survey method and assumptions in reports. The company chieftains having an access to the complete report are of course too busy to go in to the nitty gritty issues.

As far as growth is concerned, without an increase in consumer spending all growth would either be for two reasons -
1. A buildup of inventory
2. Data / Method manipulation
An inventory buildup is nothing but postponing the slowdown. Besides blocking capital, it could have disastrous results of building up stocks that may not sell. Data and method manipulation is like a self fulfilling prophecy. It keeps the firms happy till the time they suddenly have to shut shop. This may be partly due to the psychological behaviour that says that humans create self belief worlds to avoid recognising situations that are potentially dangerous.

A good measure to measure the automobile sector growth would be to trace the out flow of auto loans issued by the finance companies. Finance industries are highly regulated and getting this data would not be a problem. Measuring gowth on the basis of factory dispatches would be skewed by the change of pipeline inventories with the dealers.

In all this circus I can conclude that companies are intent to hide the real growth or fall. They use selective measures at different points of time to prove the point they want to prove. Maybe in some other post I will discuss the motivations for this.

My simple prescription - macro indicators like growth can be measured by very simple and straight indicators. To make real use of the published growth indicators it is very important to investigate the method used and the assumptions. Any jubilation or a planned course of action without this simple probe would be a dangerous step.

Survivors of Overcapcity in Chinese semiconductor industry

2009-04-21T05:47:00.000-07:00

The capacity utilisation in Chinese semiconductor industry is at 40%. Check this article here for details.

http://www.circuitsassembly.com/cms/news/8212-nearly-60-of-china-chip-manufacturing-goes-unused-in-q1

Who will survive, the large plants or the small ones? The obvious answer and also suggested by the article was that this low capacity utilisation was a death knell for small and marginal players. There is an assumption here that smaller companies would be unable to compete on technology and price.

The costing that have been arrived for large companies have been with the assumption of close to a full capacity utilisation. These large companies with a larger components of fixed costs would not be able to sell the products at the same price in case of a recession. The smaller and flexible companies with their abilities to produce smaller batch sizes at the same prices as before. So, who would survive?

Besides this it depends a lot on the source of capital. A company with little or no borrowed funds would have no fixed interest burdens. They would definitely find it easier to survive. Assuming that the smaller players would probably be less leveraged this again gives the advantage to smaller players.

The large players however might be able to influence government policies. They might be able to extract interest set offs and other tax decisions. Being larger they of course have a louder voice to influence the government. However this alone will not be sufficient to ensure their survival . The demand needs to pick up faster. All said I would vouch for the smaller players surviving.

Product proliferation

2009-02-07T00:04:00.000-08:00

Companies had recklessly increased their product offerings in the last few years. I think in one my the earlier posts I have called this a corporate Hara kiri. Production capacity was a constraint and an increase on variety would mean a higher setup time component. This would further reduce the output.

One thing that has changed is that Production capacity is not a constraint now. Demand has drastically come down. In this period if surely makes sense to offer more variety of products and try to win over more customers.

There are two costs associated with variety. One of them is the cost of setup and changeover. The cost is the value of time in which the machine and operators are not productive. It does not involve an actual cash outflow. More changeovers would mean more idle time and less production and hence the cost. This cost is applied assuming that capacity is a constraint. If there is excess capacity more change overs would not have any impact. This part of the costs could be totally ignored.

The second set of costs would be the costs of inventory. Higher variety would mean a higher variety. Companies would have to take care of these costs. Higher inventories could cause a drastic increase in costs. Companies could look into modularisation or product postponement as a solution to this.

Companies have to and should expand their product offerings. That done, they will have to do it smartly and avoid the costs of inventories that it would create. Costs of set up could be ignored. Check this report on Grainger coming out with its largest ever catelogue.

http://www.inddist.com/article/CA6634851.html?nid=3901

A few months back I would have called it a stupid move. But, with the current reality and the an assumption that Grainger will manage it well, I think it was a smart move.

Location

2009-01-11T22:09:00.000-08:00

Dell shifts from Limerick to Poland. Check the link below

http://uk.reuters.com/article/UKNews1/idUKTRE5076PT20090108?pageNumber=1&virtualBrandChannel=0

This change is a continuation in the changing paradigm at Dell. For one it started selling computers through a third party (Walmart) last year. Dell has traditionally been strong in the B2B segment. The move to retail computers through Walmart was probably to take a pie in the individual consumer market. This decision could have been taken as Dell sees a reduced growth or stagnation in the B2B market.

In the individual consumer segment (home segment) the major differentiation is on price, except for Apple of course. This is forcing Dell to look at all possible sources to save money. This includes shifting to a different location and even getting more work done by its vendors. This is a new game for Dell. And like I had written in an earlier post, it is too early to say if Dell will thrive in this change.

modified JIT

2009-01-02T01:00:00.000-08:00

The American media has never understood the Toyota Production System (TPS). Like I mentioned in the last post, by using "JIT" to denote TPS, an image has been created of an ultra efficient factory with 'zero' inventory and all supplies coming in small lots. Inventory is just one of the many wastes in TPS.

Check this link
http://www.bloomberg.com/apps/news?pid=20601101&sid=a67TdTDZscbQ&refer=japan

One more time an American newspaper is predicting a 'modified' JIT. They had done this about 18 months back when Japan had an earthquake and Riken, Toyota's key piston rings supplier had suffered extensive damages. The article predicts / prophesies that JIT will have to be modified as a lot of suppliers may shut shop. The tone of the article seems like a little kid who has always lost and sees a faint hope of getting back one.

America's automakers have never been able to match up to the Japanese. They tried superficial implementations without much success. All this seems to have hurt their ego a bit too much. The American press has always tried to belittle the Japanese systems and has quite often come up with predictions of the end of TPS. This article is nothing but one more such attempt.

The recession is sure going to force Toyota to change some policies. A few Japanese companies may also close. But, keeping extra inventory definitely does not mean a modification in JIT. JIT is more about an approach of continuous improvement and waste eradication. If the current nature of industry demands higher inventory than keeping it certainly would not go against the tenets of JIT/ TPS.

lean healthcare

2008-12-29T05:35:00.000-08:00

The Toyota Production System (TPS) earned the sobriquet 'JIT' in the 1960s. It created a very narrow view of TPS and created an image that it was suitable only for discrete and repetetive manufacturing industries. It created an image that implemeting TPS meant 'zero inventories'. Actually zero inventories are only possible when the production shop is shut down for good.

The word 'lean' has replaced JIT to describe TPS. The word first surfaced in an article by Krafcik in the Sloan Management Review in the Fall 1988 issue. Womack's book 'The machine that changed the world gave the word 'lean' worldwide acceptance. Both Krafcik and Womack talked about TPS. The only difference was that they talked in terms of generic principles. This caused a
huge change in the nature of TPS implementations. Service organisations started implementing their own version of TPS.

Check this article of lean implementation at a small hospital.
http://minnesota.publicradio.org/display/web/2008/12/23/leanhealth/

It gives a very good message. TPS / Lean / JIT is not merely about inventory reduction. They are a set of principles. It is about making work more simple and reliable. Kanban, TPM, etc are merely tools. Lets hope more organisation abandon the jargons and fall in love with the simplicity of TPS.

End of an era?

2008-12-17T23:16:00.000-08:00

The GM and Chrysler bailout funding drama just does not seem to end. Both sides have their points. But that the Christmas vacations may never end in these two companies is definitely a possible situation. Read this article:
http://www.nytimes.com/2008/12/15/business/15costs.html?fta=y
It is a common academic statement that rarely have companies survived by cutting costs. Yet, it seems sad that such huge multi billion dollar enterprises have to stoop to a level of monitoring all purchases of over $10,000. Everything in the press is about how these and other auto companies are acting to reduce costs. Nothing is about new strategies on how to earn more money. If saving costs is a prime requirement, pensions - they are said to be as much as $1500 per car for GM, could be first reworked. Better deals with hospitals could be worked out, lower insurance premiums negotiated. A 10% savings here would be a lot higher than the savings from saving a few sheets of paper or electricity.

That sales will fall is an accepted fact. Earning more money means increasing margins. It also could mean doing something else with the spare capacity / resources. Auto companies could think of a business where they refurbish old cars. People still would need to move and cheaper used cars (that are refurbished by the original company) could be a good business.

The companies need to do something positive and not merely cut costs. I am sure there would be a way. If nothing is possible maybe they could prepare for a grand end that has a minimal impact. All said, with the current spree of cost cutting and waiting for the 'bridge' loan seems to be a stop gap measures. The sales are going to continue to fall and a new loan would again be required in due time. All the Best Gm and Chrysler.

Effect of terror attacks

2008-12-03T05:23:00.000-08:00

Check this link -
http://online.wsj.com/article/SB122828423164375463.html?mod=googlenews_wsj
If we go by this article, the terror attacks in Mumbai are by themselves not going to have a major impact on the investments in India. While Indians may cheer it as great news and a measure of confidence on the so called "Great Indian Dream", I believe it is a lack of foresight.

The continuous acts of terrorism in India clearly demonstrate the lack of security and political will in India. Add to this the token and glamour based opposition from the people (candle light vigils, human chains) clearly show that the situation is not about to change very soon. In fact it would get worse. Especially for American and Israel based companies in India. Given the solid planning demonstrated in the current strike, it would not be difficult for the terrorists to strike selective targets. Targeting the factories that are in rural areas would even be easier.

There could be a few reasons for the international manufacturing companies not changing their plans
1. They already have invested substantial capital and pulling back now would be a major loss
2. They see India as an extremely cheap manufacturing destination. Given the current economic downturn, the companies might feel that the India cost advantage might make survival possible.
3. They plan to staff the Indian Operations with very few expatriates and so the death / damage would be of locals only.
4. Suitable insurance policies to take care of all possible financial losses.

I believe all the points are myopic.
1. As companies are reducing production, with new capacity in India coming up they would have to stop something. Either way capital loss is certain. The continued cost of keeping non operating plants in Europe / USA (pensions and other overheads) might work out to be substantial.
2. Given the lack of infrastructure the real costs of producing in India might be higher. The added security and insurance costs would also add up.
3 & 4. The disruption of supply from the India plant would be a huge loss. Especially in a recession based market. Competitors would take away the market share in the time in which the supply resumes. Getting it back would be very difficult and costly. No insurance policy or alternate manpower planning can reduce this loss.

My message - India is a huge risk proposition.

Manufacturing cuts in Japan

2008-11-29T02:32:00.000-08:00

Manufacturing cuts are a rule now. Check this link that talks of cuts in the supposedly super efficient companies from Japan.
http://www.google.com/hostednews/ap/article/ALeqM5jmfkCQFvxtt6IXRmfAjmFGTya2yAD94NR8580

The production cuts would of course be useful only if they create a substantial reduction in the costs. For companies with a high level of fixed costs in the form of expensive machinery or pension expenses, the cuts would not help much. They might be better off in reducing prices and hoping (and praying) that the demand picks up.

I am sure there would be other things to do. Companies of course have a reserve fund that they can use to survive in such periods. But there should definitely be other techniques that manufacturers can leverage on in these hard times. Reducing production and firing people seems to be a knee jerk reaction. I do not have a solid proof on what I am saying, but I hope I can create a complete picture in the next few posts.

An America without manufacturing

2008-11-15T07:59:00.000-08:00

Check this passionate appeal to save the automobile companies in the United States..
http://www.detnews.com/apps/pbcs.dll/article?AID=/20081115/AUTO03/811150338/1149
Part 1
Manufacturing has this unique ability of generating jobs for a lot of people directly and indirectly. An automobile factory needs vendors, who would themselves need vendors and so on. Since this is a sector on which so many people depend, and that has such a wonderful legacy of promoting the weaker sections (African Americans), should it be allowed to shut down? If we say no, are we not going against the basic principles of capitalism? Is the purpose of a firm job creation or is it profit?
If I take another view, is the motive of a firm its own profit or the benefit of the nation in which it conducts business? Would it be okay for an American company with invenstments from India to take a step that is in American interests but may not be slightly detrimental to the company?
Part 2
America has a rich history of innovations. They have a strong knowledge economy. Can the nation survive on the basis of this knowledge economy without owning their own source of manufacturing?
Part 3
America is supporting financial institutions. If these companies can be supported why not the Big 3?

I do not have answers. maybe at some point someone reading this might come up with something. I might add something myself later.

Yahoo for Indian manufacturing?

2008-06-30T00:25:00.000-07:00

A report in the Economic Times says that among the top five companies in India, four are manufacturing companies. Chk this report here:
http://economictimes.indiatimes.com/Editorials/Indias_manufacturing_story/articleshow/3173702.cms

On the face value this is a time to say "Cheers" to the Indian manufacturing industry that has been in the shadows of accomplishments by service companies. History has repeatedly shown that the super powers, whether Romans, Greeks, Russians, Americans or Chinese have been all manufacturing led economies. India with a push in service and software oriented industries was trying to create a different path for global dominance. While creating a different path is not a problem it had imposed a sort of step motherly feeling for manufacturing. The general sentiments also did not favour manufacturing. That India would always be an underdog to China in manufacturing was accepted as fait accompli.

At one level the report surely increases the confidence level of Indian manufacturing. It sort of creates a feel good factor. This feel good factor is not a small thing as it slowly create a wave of positive attitude towarda manufacturing industries. This would mean more people taking up manufacturing as a profession, more investments, more output and so on. It is only on the basis of such positive sentiments that economies develop and take off. There are of course tens of ways to counter the article. The aquistions of Indian firms are still young and cannot be called a success. Manpower is still a huge problem. But overall the article does give a thumbs up for the manufacturing sector.

Fuel costs dictating change

2008-06-11T01:47:00.000-07:00

Continuously rising oil prices have thrown many calculations out of gear. Suddenly the cost of one drop of fuel has begun to matter. There are reports of Americans moving towards smaller and fuel efficient cars. I refer to Americans because they are the most inefficient users of oil and other energy. As a fallout of this most automakers have changed their production plans. Check this report on Nissan.
http://www.allheadlinenews.com/articles/7011219024
Nissan is cutting production of its SUVs and trucks and moving towards making more Ultima cars which I believe would be a lot more fuel efficient. Most other automakers would have already changed their plans as well. To be able to make the new plans effective is altogether a different question.

Small cars are typically low margin high volume business. SUVs are high margin vehicles for manufacturers. Changing from SUVs to small cars is not merely changing from one vehicle to another, it is a huge change in mindset. Every small waste has to be examined in case of low margin businesses. SUV factories may not be tuned to operate in this environment where every single bolt and washer has to be accounted for.

Since the talk is on changes being dictated by fuel, I would like to point out one more article-
http://www.nytimes.com/2008/06/11/business/11air.html?hp
Airlines are now washing the engines more often as small specks of dirt can increase the fule consumed. They are also switching to lighted seats, carrying lesser water for toilets. Fuel which was 15% of their costs in the year 2000 is all ready more than 40% of the costs today.

If I think of the time aircrafts in India spend on circling the airports (plus the low cost of manpower), I am sure the proportion of fuel costs would be much higher. Smarter management to reduce this time would easily bring a smile to the bottom lines of most airlines. Such changes and calculations would be considered academic last year, but today it could mean a difference between life and death.

Global manufacturing

2008-05-29T23:03:00.000-07:00

The flavour of the season for global conglomerates is to have specialised factories in different parts of the world specialise in a certain product. So, for example, a manufacturing plant in India can be a hub for small heat exchangers that are supplied to the entire world from here. The same company would supply boilers worldwide from their plant in China. This supposedly ensures that the companies get the benefits of scale and specialisation. Also control is easier.

What this ignores is that the businesses becomes too dependant on the fuel prices. At the US$125 per barrel range I am sure that the entire mathematics of localised manufacturing has gone awry. Read this article that talks about manufacturing in China becoming uneconimical:

http://seekingalpha.com/article/79417-challenges-pile-up-for-chinese-manufacturing?source=news_sitemap

The key would be to find the proportion of fuel costs in the total cost of the product. The company could then factor in the fuel comfort zone - the price of fuel upto which they are comfortable manufacturing in specialised regions.

Struggling Dell?

2008-05-22T22:50:00.000-07:00

Dell Inc. is closing its manufacturing facility in Austin, Texas. check this article.
http://www.marketwatch.com/news/story/dell-close-texas-plantweigh-sale/story.aspx?guid=%7B0DF2ADF8-453A-4B08-BC32-74E75CFA0389%7D

The article starts by labelling Dell as a 'struggling computer maker.' This is the first time I have seen the adjective 'struggling' being used to describe Dell. The makers of Dell had a merry time because of absence of legacy supply chain that allowed them to sell products directly. While direct sale was good for the commercial segment, retail consumers were never the major target of Dell. Now, with commercial spend on a tight leash Dell has no option but to look out and attract retail consumers. This is easier said than done.

China and US at it again

2008-04-22T22:20:00.000-07:00

The current feud is about contaminated heparin that has apparently caused 81 deaths in the United States. To a lay man it might seem like a simple issue of contamination happening at a local facility in China that has weak processes. Read this link in The New York Times
http://www.nytimes.com/2008/04/22/health/policy/22fda.html?_r=1&scp=1&sq=heparin+China&st=nyt&oref=slogin
There is an amusing paragraph in the middle: China has in recent years exported poisonous toothpaste, lead-painted toys, toxic pet food, tainted fish and now, contaminated medicine.

All this seems to be part of a larger battle to assert dominance. This is not a political blog, but the point of putting it here is that your products may suffer becuase of your country's relation with your customers' country. Judging by these events I think it might be prudent for small manufacturers to avoid certain markets altogether. In short run it might seem to be a bad business idea, but in the long term it should work out.

Moral of the story: Just because you have a market, it may not be a good idea to sell there.

New product development

2008-04-22T03:14:00.000-07:00

My last post in November 2007 was about sew product development and so I start the blog again after 5 months on the same topic. When the user and the designer are two seperate departments both would naturally have different requirements. Not necessarily all these requirements can be mapped, because all may not be logical. For example if a doctor has a preference for a particular brand of surgical instruments he will not switch brands merely on the basis of logic. There is a realiability based bond that he has with the current brand.

Coming back the the point, when users and designers of a product are a very different set of people, conflicts are bound to occur. Nothing displays this conflict more than the development of India's indigenous battle tank Arjun. The designer is DRDO and the user is the Indian Army. Chk the link
http://www.business-standard.com/common/news_article.php?leftnm=10&bKeyFlag=BO&autono=320813
Ajai Shukla has done beautiful work in bringing out the story from both sides.

One more point of consideration is the long lead time of design. The long lead time ensures that customers have time to be impregnated by new ideas and rock the existing boat. The key would be to create a product as fast as possible and give it to the customer. There will always be a scope for improvement. This scope should not limit the product being produced. Like the Eurofighter mentioned in the article, a basic product should roll out first and then there can be incremental improvements. Unless there is a huge safety issue I believe that some product is better than no product. Given the strategic nature of defense sector I believe that some version of the tank should be in service as soon s possible and it can be developed as and when needed.

I'll do some wishful thinking here. Maybe if the design was modular, we could very easily replace the old technology modules with new gadgets as soon as they are designed.

Global approach?

2007-11-02T05:07:00.000-07:00

Mahindra and Mahindra's Scorpio is now a legend. It is a completely 'India' car designed at a fraction of the cost of all international automakers. Mahindras used the knowledge of their vendors to have some form of distributed design to speed up and reduce the cost of new product development.

http://findarticles.com/p/articles/mi_m3012/is_10_182/ai_94335258

The link is a very detailed article on the evolution of Scorpio.

Boeing 787 dreamliner followed pretty much the same story. Boeing had a practice of giving completed designs to its vendors. For the 787 they let their vendors do a lot of their own designing themselves. The 787 project, if documented, could be a lesson of how not to manage a new product development.

http://seattletimes.nwsource.com/html/boeingaerospace/2003986302_webbair01.html

This brings me to my central belief that nothing is 'good' or 'bad'. There is a lot more to these practices than meets the eye. Implementing modern techniques taking them at their face value is not a guarantee of success. The deeper implications need to be understood.

It is not that collaborative designs cannot succeed in aircraft industry. Also it is not that the concept will always be a hit in automobiles. There are a lot of 'other' factors involved.

I am not too sure of being able to document these other factors as of now. I would love contributions to help me answer this..

taxing of alternate technologies

2007-10-26T20:21:00.000-07:00

If we consider the life cycle of any product, at least 30% of it is paid as some for of 'tax' to the government. The taxes are justified as the production of goods consumes some resources that are in public domain. The idea would be to balance the revenue from taxation with the costs that the government has to incur because of that industry / product. Of course there is some additional amount for general public expenditure.

The nature of costs have drastically changed. However the taxation has not. Water and air are much more dearer today than a few years ago. The taxation has to changed to reflect this. Some products that may seem to earn money for the government, may actually be a drain on the system. Cigarettes and alcohol are major tax revenue earners, at least in the Indian context. However, when this amount is compared to the money spent on subsidised public health care or the loss of human resources it may not amount to much.

If there is some product in a particular category that does not use up as much of the water and air resources, meaning it uses clean technologies, it must be taxed considerably lower. There could be a special subsidy for green products or an additional duty levied on polluting industries.

In the short run the subsidies may seem to 'cost' the government, but it the long run we may all be better off with cleaner products and technologies. But of course governments all over the world have their own ways. In this context taxing of India's first electric car "Reva" at par with other cars seems unjust.

http://www.sonyclassics.com/whokilledtheelectriccar/

Check the above link. Things are maybe not as straight and simple as they seem.

Ahh, but there is hope too, check the link below.

http://www.channelnewsasia.com/stories/singaporebusinessnews/view/307933/1/.html

Happy weekend.

Going Green

2007-10-21T20:30:00.000-07:00

I am sure this will not be the first post on the topic of environment friendly manufacturing. The Sri Lanka Sunday Times has reported that the worlds first clean fabric manufacturing zone (MAS Fabric Park) has opened in Sri Lanka. They plan to recycle most of the effluents, generate bio gas, compost (fertiliser) and all. Look at the link below.

http://www.sundaytimes.lk/071021/FinancialTimes/ft302.html

A question is if such examples are mere blips in the otherwise "dirty" world of manufacturing. I strongly believe that there is no question on the need of clean technologies. Sustaining business on a long term needs clean policies.

At some level it is all a question of economics. Water is very cheap, so there is no incentive for companies to recycle. Air is free, so again, clean technologies are not really a priority. What should the governments do? This question can be a wasteful intellectual discussion and would probably have no end. A better question is what we in business should do.

All new facilities set up anywhere must be environmentally friendly. Yes, strong anti pollution legislations may not happen in the near future. But, one bout of acid rain can change all that. The recent Nobel peace prize to Al Gore has also made it difficult for governments to ignore the issue. Businesses can expect strong pressures for clean technologies in a few years. Rather than have facilities that are rendered redundant, it would be smart to start the plans from today.

Here's one more link

http://www.edmunds.com/insideline/do/News/articleId=123102?imw=Y

Kia Motors is planning mass production of its new "green"vehicle.

One supplier?

2007-10-17T20:23:00.000-07:00

On July 16th 2007, an earthquake struck Japan. Riken, a company making piston rings for almost all Japanese auto companies had suffered massive damage. Most automakers were forced to slow down their output. The article below highlights the damage.

http://www.usatoday.com/money/world/2007-07-18-toyota-quake_N.htm

More important were the questions that ere raised about the Single vendor concept of JIT. In this era where disasters are not as rare as they were earlier, would this strategy of single vendors work out? A damage to one vendor can halt the entire industry.

The article below takes a much more pragmatic view of the event.

http://www.ventureoutsource.com/contract-manufacturing/supply-chain-management/lean-manufacturing/just-in-time-jit-strategy-feels-earthquake-tremors

Toyota and Honda had deployed their engineers to help Riken back on its feet. This kind of cooperation in commercial relationship is not something that we here often. The single vendor concept was forcing them to work as partners.

And at the end of the day, I believe that its almost impossible to plan for all disasters. The buffers, if created, to mitigate the impact of all possible disasters might turn out to be costlier than the disasters themselves!!

I feel JIT system will not be changed much because of this damage. Maybe one more line would be added in the formal partnership relationships that would talk about disaster management. Lets see what happens, till then, Long live JIT...

soft suicide

2007-10-15T00:42:00.000-07:00

Have a look at the article in Times of India,

http://timesofindia.indiatimes.com/20_new_car_models_to_roll_out_in_2008/articleshow/2458531.cms

Wow, 20 new car models models in 2008. A rough assumption: 20 could be the number of new vehicles introduced by all vehicle companies in India combined from 1950 to 1975.

All said and done, I am not sure if our companies are ready for so many models. A thing to note here is that we are talking of 20 models and that may mean about 300 variants (colour, air conditioning, etc).

Most Indian plants, including lines of Suzuki, Hyundai and Tata Motors have been set up to mass produce a few models / variants. Most of them are setting up new plants and I think these new facilities will be tuned for mass customisation. So, till this time the new facilities come online, producing multiple variants from the old facilities is going to be taxing.

It is impossible for automobile companies to not introduce new models and yet get the necessary sales. It is also similarly very expensive for Indian auto companies to produce multiple variants from existing facilities. So the companies are introducing new models and hoping that the new facilities come up soon.

It is a catch 22 situation. Though it seems that the new facilities will come up in a year and two and that this is going to be a short term challenge, I think otherwise. The volumes in India are much lower than volumes in other countries. The specific challenge here is providing all the models / variants at much lower volume.

The good part is that I am in academics with zero investment in automobile equity. I can wait and watch, and maybe a year later write a few more lines. Right now, all I can say that it is going to be an interesting and thrilling journey.

India overtaking China in manufacturing?

2007-09-29T04:14:00.000-07:00

There was a report by Capgemini that India is all set to to challenge China as the preferred destination for manufacturing outsourcing. The big 'if' is that government needs to work on and improve the existing infrastructure.

At some level, I do not think that this conclusion needs research. It is common knowledge. There is no difference of skill level among Indian and Chinese. The same manufacturing machines can be set up in either India or China. In addition, India has theoretical added benfits of being a democracy and having an active legal system.

Summary report on Capgemini site
http://www.capgemini.com/m/en/n/pdf_India_Set_to_Challenge_China_as_Global_Offshoring_Sector_Evolves.pdf

News item on indiatimes
http://economictimes.indiatimes.com/Indicators/Manufacturing_India_to_challenge_China/articleshow/2413138.cms

Blaming China

2007-09-27T20:08:00.001-07:00

US companies have shamelesly imported material from India, China and other south east asian countries in flagrant violation of laws and ethics that they profess in their home state. Be it child labour, retirement plans, working conditions or wage parity; American companies have ignored everything to ensure that they get 'cheap' products.

Whenever things go wrong, American companies have had no problems in shifting the blame to these countries. It is very interesting that China has been able to arm twist Mattel to issue an apology saying that the recall were less of production and more of design issue.

See this link:
http://www.economist.com/business/displaystory.cfm?story_id=9867908

Outsourcing production or services does not absolve the parent company from responsibilities of the product adhereing to guidelines and regulations. It is immature and possibly dangerous for the outsourcing firms to blame their partners for lapse. Imagine, if Mattel customers reduce buying 'Madi in China' toys, Mattel as a company would suffer tremendous drop in sale!!

The new DELL

2007-09-16T21:44:00.000-07:00

Dell enjoyed its supply chain excellence based direct selling model for many years. This year it has started selling PC's through Wal Mart and Sam's Club stores. This would be a new ball game for Dell, a game that Dell's competitors' (HP and Acer) have been experts at.

Dell is trying to target retail consumers and is faced with its first bout of problems. Rising customer service costs, maintaining dealer relations, rising product complaints (because of higher product variety), etc.

The article (link pasted below) does not point out solutions, only highlights the problems.

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1799

Hello..

2007-09-16T21:10:00.000-07:00

Its a new Monday morning....

This place would be for current and relevant information on Operations Management. Operations could actually mean anything today. But I will stick with a few things: Production, Supply Chain and Technology.

I do not intend to create new knowledge here. I intend to create links to the best material available and have a brief summary on it so that you can decide if its worth your time to study the entire article.

Wishing me best of luck!!!