takes a thief to nail another

Pharmaceutical companies, I feel, make too much money. Making money is not a problem, but to do it under the guise of a 'noble' profession or creating artificial non tariff barriers is definitely not right. Bayer has some cancer drug and Cipla has introduced a copy cat version at 10% of the price. Read the article in Economic times.

http://economictimes.indiatimes.com/news/news-by-industry/healthcare/biotech/pharmaceuticals/Cipla-makes-cancer-drug-cheaper/articleshow/5776074.cms

Point one - To invent a radically new drug there are high R&D costs. Every drug maker needs to have a business advantage for some period of time so that it can recover the cost of this R&D. This is what the patents do. In this period pharmaceutical companies price medicines more than 100 times the material (and variable) cost as they have to recover the sunk costs (R&D). The debate is on the length of this free run time. With pharmaceutical companies having profitability significantly higher than the average corporate rate, it is obvious that the free run period is a bit longer than what it should be.

Point two - Cipla says that they are introducing the new drug for Indian patients. I doubt this. They are doing it to make money. Like I said before, the material cost in such cases is less than 1% of the sale price. Since Cipla has not done the basic R&D for the product they would be making a huge profit on the drug. They do not have any other major fixed cost to recover. If they were really interested in 'serving' the Indian patients, they could have offered it at a 10% or 50% margin over the material cost. This they will surely not do.

'Profit' from a store?

There is news in today's Economic times that Aditya Birla Retail MORE have closed 39 of their stores in Gujarat. This is one third of their stores in Gujarat. The reason was that the stores were not making money. Have a look at the complete article:

http://economictimes.indiatimes.com/articleshow/5748697.cms

Calculating the 'profit' from an individual store is difficult. How do you attribute costs of a delivery vehicle serving five stores in one locality. Closing one store is not going to reduce the logistics costs by 20%. Similarly the costs of the central buying team, and the CEO is not proportional to the number of stores. Thus, if the decision has been taken using traditional costing, I think it would be a blunder. It is incremental cost that matters here.

While costs are not proportional to the number of stores, unfortunately sales is. When stores are shut, sales will definitely go down in direct proportion. It is only the lease and the local manpower costs that would come down. The costs of expensive expat CEOs and the central organisation overheads would stay. Sometimes the drop in sales could be higher than the drop in store level variable costs and put the company in deeper problems.

Stores have been opened without detailed analysis based on some global ballpark figure. This was the first wrong step. Every retailer opened multiple formats. The second wrong step. Now, with cash crunch they are closing the stores recklessly, the third wrong step. My take: If a retail group is sinking, shutting a few shops is not going to help, yes the inevitable could be delayed a little.

Hawthorne Effect

In between 1924 and 1932, experiments were conducted in a factory to study the effect of parameters like illumination, work breaks, work day length and salary / incentives on productivity. When illumination was increased for a test group the productivity increased. However when the illumination was decreased the productivity did not go down. The researchers concluded that the change of productivity was because the operators in the test group felt motivated that they were being 'special' and that Management was 'interested' in their work.

http://en.wikipedia.org/wiki/Hawthorne_effect

You can see the above link in Wikipedia to know more.

I came across an interesting experiment, have a look, it is a six minute video on youtube.

http://www.youtube.com/watch?v=b_YAJtJmPLE

When people crossing the road were informed that jaywalking was not the right thing, a good number of people avoided it. It is a good experiment worth spending your six minutes on.

The larger concept is that people need to be told and retold what they are supposed to do. And, they need to know that their performance is being monitored. Just doing this will ensure that a good majority of employees will adhere to the processes in the short term at least. Even if we have it in our SOPs we need to keep re enforcing the message to the process owners / process executioners again and again. They need to be told that it is important that they follow the process. With 80% of your employees or subordinates getting in line, your job will be reduced to monitoring the remaining 20%.

Over a long term of course this may not work. A house with a sign "Beware Dangerous Dog" will surely keep away people for a while. But, if a bark is never heard, I am sure there will be people who will take a chance. For long term process adherence, we actually need to incentivise individuals according to the degree to which processes are being followed by them.

Green Scams

For all my support to the issue of going 'Green' I think that companies are taking us for a ride. Projects that plan a saving of a few million metric tons of green house gases are common in newspapers. This is then linked to the equivalent of removing a few million cars from the road. I think we sum up all the gases the benevolent companies will save, by 2015 we might go into a negative, where we are actually sucking back some carbon emitted in earlier years!!

The first suspect is the method the firms use to calculate and project the savings. A company could project a 50% increase of business in the next few years. Accordingly they could extrapolate the emission to an increase of 50%. They could then show a petty saving on this extrapolated amount.

next, as a learned friend pointed out, is the concept of net pollution reduction versus the gross reduction. Electric cars are not totally pollution free. Electricity generation is polluting and the lead acetate batteries are dangerous to dispose. So the pollution from increased generation of electricity and the disposal of batteries has to be subtracted from the gross savings of vehicular emission. I believe that when stating reduction targets, instead of informing the net savings, companies are giving the gross savings value. This could be substantially higher than the real savings achieved.

Like pointed out in the previous post, some savings could be merely shifting of activities to vendors. While the company has reduced emission, there are no supply chain wide cuts. Such activities might in fact increase the transportation and hence the net carbon emissions.

I have always maintained that a cigarette smoker giving up the habit definitely benefits the environment. But, the bigger benefit is to himself. He would probably add a few more years to his life, and it is impossible to calculate the cost benefit of this act.

Environment Management Systems

Multinational companies (MNC) engaged in electroplating processes in India outsourced them. Instead of doing it themselves, they had other smaller firms do it. The reason being that electroplating was a very polluting process. The organisations would not be able to seek ISO 14000 and other environment certifications. With vendors indulging in polluting processes would not impact in the certification of the organisation. The rights and wrongs of this could be an issue of another post.

One electroplating vendor installed additional equipment to neutralize the effluents from his unit. He hoped that since he himself had an environment friendly process, he would be a preferred choice for MNCs. These very companies in the United States and Europe were bragging the virtues of environmentally friendly practices in many conferences. The vendor was disappointed as no firm, neither MNC nor Indian, was willing to pay extra for environmentally friendly electroplating.

Two points here - industry leaders would follow 'green' norms only if their survival was directly threatened or because of government norms. To expect businesses to voluntarily take up such practices would be a case that is not supported by history. The pressure to achieve immediate bottom line results is far too immense.

Second, environmentally sound practices currently are like the end of the line inspection policies of early 1940s. Manufacturing plant would make the products and the Quality inspectors would assess the finished products. That a product is 'bad' would not be known till it comes to the very end of the assembly line.

Gurus like Deming and Juran had an emphasis on Total Quality that would avoid poor quality products. Feigenbaum's concept of cost of Prevention was supposed to overall reduce the cost of Appraisal and the cost of Rejection. They were in favour of ensuring that poor quality does not happen rather than correct a defective product.

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

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

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.