Logistics cost reduction

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

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

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?

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

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

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

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.