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?
Saturday, September 26, 2009
Tuesday, August 25, 2009
one more JIT
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.
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
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.
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.
Wednesday, August 12, 2009
..And this is how SCM does not work
" 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.
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.
Monday, August 10, 2009
This is how SCM works
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.
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
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!!
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!!
Thursday, July 30, 2009
New auto factories?
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.
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.
Subscribe to:
Posts (Atom)