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.

The Chicken and egg story in Logistics

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

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

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.