Integrating with Customers and Suppliers during Product and Process Development

October 18th, 2010

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What is the logic behind pursuing early supplier design involvement with suppliers?

Supply chain management is an innovative response to the needs of the global business process. Supply chain focuses on quality, cost, flexibility, reliability, and innovation. One of the essential parts of a successful supply chain is the excellent supplier relations. Today’s products have high levels of complexity which forces companies to work with suppliers to reduce the costs of the product as well as improve the production efficiency. The logic behind pursuing early supplier design involvement is clear that Integrated Systems is trying to take advantage of potential benefits of early product and process development. These potential benefits include:

  • Increase in product quality
  • Stronger communication between firms
  • Decrease in process time
  • Decrease in production cost
  • High utilization of sources
  • Innovative products and ideas
  • Decrease in cycle-time
  • Decrease in time to market
  • Increase team work
  • Opportunity to establish quality circles

    • Quality management is a turning point in the understanding the importance of quality. I mentioned about Kaizen in my other posts. Kaizen is a Japanese philosophy that is based on continuous improvement throughout all aspects of life. If implemented correctly to a business, Kaizen may improve all business aspects which in turn will increase overall quality. When overall quality is improved, companies will eliminate waste, decrease defect rate, will simultaneously lowering their production cost. Early supplier design involvement is a form of Kaizen because it focuses on process. In production, small improvements result in a end product that is high quality and low in cost.

    Previously I have examined Toyota’s supplier relations as a case study. Many supply chain enthusiast should bow in front of Toyota and their Toyota Way. If we are going to talk about early product and process development with suppliers, Toyota should be without a doubt included in this subject. Integrated Systems should benchmark Toyota’s system and implement into their business. What makes Toyota so special is their extremely high success rate of early supplier relations. Toyota was able to increase product quality and reduce the cost significantly as a result of of the innovative ideas from suppliers. Toyota’s supply chain management and Japanese work ethics are simply fascinating. Figure 3 below shows the essential parts of how unique Toyota’s Supplier relations form a supplier partnering hierarchy. If we have a closer look at the practices in the supplier-partnering hierarchy we discover Toyota’s underlining commitment to forming profound supplier relations. Exchanging practices, sharing information intensively, innovative approach, and Kaizen& learning suppliers are all crucial parts of their successful supplier relation system.
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    Figure 1: Supplier Partnering Hierarchy
    Source: The Toyota Way

    Quality is an essential part of production as well as company brand. When overall quality is improved, companies will eliminate waste, decrease defect rate, and lower their production cost. Quality is a race without a finish line because there is limitless room for improvement. Products are driven by customer wants and needs. When there are so many companies in the market, quality plays an essential role in decision making. Founder of Procter and Gamble Company, William Procter said, “The first job we have is to turn out quality merchandise that consumers will buy and keep on buying. If we produce it efficiently and economically, we will earn a profit.” In addition, quality could be competitive advantage. Competitive advantage makes a significant contribution to business success. Companies can always increase their quality. In this global world, companies will continue to grow and succeed only improve business aspects such as, business processes, customer service, and product quality. Nowadays, quality is not a luxury it is a necessity that must be incorporated into each product.
    According to Wall Street Journal, Boeing used moving assembly and supplier early supplier involvement method to reduce defects and assembly time. They were able to reduce assembly time from 40 days to 11 days as well as they had a significant reduction of production cost. Integrated Systems should use Toyota’s Kaizen philosophy and business strategy not only to increase utilization, quality, and productivity, but also reduce lead times, production cost as well as uncertainty.

    Firms may use sample process map that I have developed to help decision making. This map may serve as a guide for the firms.
    10-18-2010 4-00-02 PM

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    Posted in Improvment, Kaizen, Procurement, Quality, Supply Chain Management, Toyota | 103 Comments »

    Theory of Constraints — The Goal

    April 19th, 2010

    Whether you are a student of science, a project manager or working in manufacturing organizations or IT – the Theory of Constraints has its application in every field. The underlying business ideas of increasing efficiency/effectiveness and the challenges most managers feel in balancing personal and work commitments are timeless.

    Theory of Constraints (TOC) is an overall management philosophy introduced by Dr. Eliyahu M. Goldratt in his 1984 book titled The Goal, that is geared to help organizations continually achieve their goal. The title comes from the contention that any manageable system is limited in achieving more of its goal by a very small number of constraints, and that there is always at least one constraint. The TOC process seeks to identify the constraint and restructure the rest of the organization around it, through the use of the Five Focusing Steps.

    Key assumption

    The underlying assumption of Theory of Constraints is that organizations can be measured and controlled by variations on three measures: throughput, operating expense, and inventory. Throughput is money (or goal units) generated through sales. Inventory is money the system invests in order to sell its goods and services. Operating expense is all the money the system spends in order to turn inventory into throughput.
    The five focusing steps

    Theory of Constraints is based on the premise that the rate of goal achievement is limited by at least one constraining process. Only by increasing flow through the constraint can overall throughput be increased.

    Assuming the goal of the organization has been articulated (e.g., “Make money now and in the future”) the steps are:

    1. Identify the constraint (the resource or policy that prevents the organization from obtaining more of the goal)
    2. Decide how to exploit the constraint (make sure the constraint’s time is not wasted doing things that it should not do)
    3. Subordinate all other processes to above decision (align the whole system or organization to support the decision made above)
    4. Elevate the constraint (if required or possible, permanently increase capacity of the constraint; “buy more”)
    5. If, as a result of these steps, the constraint has moved, return to Step 1. Don’t let inertia become the constraint.

    The five focusing steps aim to ensure ongoing improvement efforts are centered around the organization’s constraints. In the TOC literature, this is referred to as the “Process of Ongoing Improvement” (POOGI).

    These focusing steps are the key steps to developing the specific applications mentioned below.
    Constraints

    A constraint is anything that prevents the system from achieving more of its goal. There are many ways that constraints can show up, but a core principle within TOC is that there are not tens or hundreds of constraints. There is at least one and at most a few in any given system. Constraints can be internal or external to the system. An internal constraint is in evidence when the market demands more from the system than it can deliver. If this is the case, then the focus of the organization should be on discovering that constraint and following the five focusing steps to open it up (and potentially remove it). An external constraint exists when the system can produce more than the market will bear. If this is the case, then the organization should focus on mechanisms to create more demand for its products or services.

    Types of (internal) constraints

    * Equipment: The way equipment is currently used limits the ability of the system to produce more salable goods / services.
    * People: Lack of skilled people limits the system.
    * Policy: A written or unwritten policy prevents the system from making more.

    The concept of the constraint in Theory of Constraints differs from the constraint that shows up in mathematical optimization. In TOC, the constraint is used as a focusing mechanism for management of the system. In optimization, the constraint is written into the mathematical expressions to limit the scope of the solution (X can be no greater than 5).

    Please note: Organizations have many problems with equipment, people, policies, etc. But the constraint is the thing that is preventing the organization from getting more Throughput (typically, sales).
    Buffers

    Buffers are used throughout Theory of Constraints. They appear as part of the EXPLOIT and SUBORDINATE steps of the five focusing steps. Buffers are placed before the key constraint, thus ensuring that the constraint is never starved. Buffers used in this way protect the constraint and should allow for normal variation of processing time and the occasional upset (Murphy) before the constraint.

    Buffers can be a bank of physical objects before a work center, waiting to be processed by that work center. Buffers can also be represented by time, as in the time before work reaches the constraint. There should always be enough (but not excessive) work in the time queue before the constraint.

    Buffers are not the small queue of work that sits before every work center in a Kanban system. The assumption in Theory of Constraints is that with one constraint in the system, all other parts of the system have sufficient capacity to keep up with the work at the constraint. In a balanced line, as dictated by Kanban, when one work center goes down, then the entire system must wait until that work center is restored. In a TOC system, the only situation where work is in danger is if the constraint is unable to process (either due to malfunction, sickness or a “hole” in the buffer).
    Plant types

    There are four primary types of plants in the TOC lexicon. Draw the flow of material from the bottom of a page to the top, and you get the four types. They specify the general flow of materials through a system, and they provide some hints about where to look for typical problems. The four types can be combined in many ways in larger facilities.

    * I-Plant: Material flows in a sequence, such as in an assembly line. The primary work is done in a straight sequence of events (one-to-one). The constraint is the slowest operation.
    * A-Plant: The general flow of material is many-to-one, such as in a plant where many sub-assemblies converge for a final assembly. The primary problem in A-plants is in synchronizing the converging lines so that each supplies the final assembly point at the right time.
    * V-Plant: The general flow of material is one-to-many, such as a plant that takes one raw material and can make many final products. Classic examples are meat rendering plants or a steel manufacturer. The primary problem in V-plants is “robbing” where one operation (A) immediately after a diverging point “steals” materials meant for the other operation (B). Once the material has been processed by A, it cannot come back and be run through B without significant rework.
    * T-Plant: The general flow is that of an I-Plant (or has multiple lines), which then splits into many assemblies (many-to-many). Most manufactured parts are used in multiple assemblies and nearly all assemblies use multiple parts. Customized devices, such as computers, are good examples. T-plants suffer from both synchronization problems of A-plants (parts aren’t all available for an assembly) and the robbing problems of V-plants (one assembly steals parts that could have been used in another).

    For non-material systems, one can draw the flow of work or the flow of processes and arrive at similar basic structures. A project, for example is an A-shaped sequence of work, culminating in a delivered project.
    All information is taken from Wikipedia

    Posted in Improvement, Kaizen, Management Philosophy, Quality, Supply Chain Management, The Goal | 174 Comments »

    Reducing Healthcare Costs through Supply Chain Management

    March 29th, 2010

    Reducing Healthcare Costs through Supply Chain Management
    Published: March 17, 2010 in Knowledge@W.P. Carey

    In the national debate over how to make U.S. healthcare more efficient, one promising area for reform is often overlooked: supplies. Whether the products are knee implants, pacemakers, or expensive medications, hospitals have long purchased whatever doctors desired with little discussion among the parties involved about cost.

    Researchers at the W. P. Carey School Business are trying to unravel the tangled supply relationships that drive up the cost of healthcare, burdening hospitals and frustrating efforts to expand coverage among the uninsured.

    “We look very strategically at purchasing, distribution, and the other related areas,” says Eugene Schneller, professor at the School of Health Management and Policy and co-director of the Health Sector Supply Chain Research Consortium. “We consider how they affect efficiency and effectiveness, as well as the possibilities for improving clinical care.”

    Co-director Natalia Wilson says, “The cost of supplies is second only to the cost of labor for hospitals. To take care of a patient in a hospital, there are all kinds of products involved, from cotton balls to bandages to hip implants.”

    Aligning interests and saving money

    Supplies are an important and growing part of hospital budgets. According to the Association for Healthcare Resource and Materials Management, the cost of supplies jumped nearly 40 percent between 2003 and 2005 and now represents as much as 31 percent of a hospital’s expenses on a per case basis.

    Jonathan Ketcham, assistant professor at the School of Health Management and Policy, has found in his research that the runaway cost of supplies is due, to a large extent, to the fact that doctors and hospitals are not in a position to cooperate. In areas of medicine with highest supply costs — notably cardiology and orthopedics — physicians determine what devices and drugs are used, but hospitals pay for them.

    “You have misaligned incentives between hospitals and physicians,” Ketcham says

    Ketcham has been studying the practice of “gainsharing,” in which hospitals reward doctors when efficiencies bring down costs. In gainsharing, hospitals and doctors divide savings from improved efficiencies.

    Ketcham recently received a two-year, $500,000 federal grant to study gainsharing experiments and other issues related to supply costs.

    Supply chain lessons for healthcare

    Supply chain management — the coordination of businesses and processes involved in producing and delivering a product or service — has been widely used in other industries for decades. Many businesses, retailers in particular, have attributed their success to effective supply chain management.

    But supply chain management in healthcare has lagged. In part, this is because healthcare deals with finished products, according to Schneller. Unlike an auto manufacturer, which can ask suppliers to design a specific kind of brake for a vehicle, hospitals usually have to take what suppliers have off the shelf.

    “It’s also an industry where supplies have not been seen as assets, and if you don’t see something as an asset, you probably don’t manage it,” Schneller says.

    The consortium has been working to build the research base that will help healthcare leverage supply management. Much of the consortium’s attention has been focused on what are known as “supply-intensive admissions,” cases in which supplies represent between 50 and 80 percent of the cost of the procedures. Joint replacements and cardiac implants typically fall into this category.

    “The reason we’ve worked in that area is that from a policy perspective, it’s one of the highest costs areas in American medicine and one of the fastest growing,” Schneller says. He points out that it is the ability for suppliers, physicians and hospitals to mutually find value in their transactions that will allow the health care industry to take advantages of the efficiencies associated with strategic supply chain management. As long as it is a “zero-sum game” it will be a contentious set of relationships.

    One approach that has promise, according to researchers, is standardization of products. If physicians can agree on common products, such as for joint replacement, then costs can be brought down considerably, researchers at the consortium have found.

    “A Chevy and a Ferrari will both get you to the grocery store,” says Schneller. “Are they the same car? No. Are they equivalent in terms of doing something? Probably.”

    Sharing the benefits of efficiency

    Ketcham is investigating whether gainsharing is an effective approach to improving the value of spending on supplies. “There is a wide spectrum of approaches hospitals can use to align incentives. Gainsharing is one of the few where cash can actually change hands,” he says.

    The practice has faced legal barriers. The Inspector General of the U.S. Department of Health and Human Services has found gainsharing to violate anti-kickback and other federal regulations. Hospitals that wish to use gainsharing must get exemptions from the inspector general, but with the federal government increasingly interested in cutting costs, exemptions have not been extremely difficult to obtain. The U.S. Medicare program has authorized experimental gainsharing programs.

    Ketcham has studied the effectiveness of gainsharing at 13 different hospitals where cardiology departments used stents for clogged arteries. In those experiments, gainsharing functioned as it was designed, according to Ketcham.

    “It led to cost reductions of just over 7 percent per stent patient, and we didn’t find evidence that it worsens quality of care or access to care,” he says.

    Working together to save money and serve patients

    Getting hospitals, doctors, and other interests in healthcare to coordinate their efforts is a key to improving supply chains and saving money, according to researchers.

    “There are a number of players so it makes it complex,” says Wilson, a research associate at the School of Health Management and Policy and physician. “Traditionally, they have functioned in separate silos. Improving efficiency and collaboration is very important.”

    In a paper published in the journal Clinical Orthopaedics and Related Research, Schneller and Wilson detail the mistrust and misunderstanding that have characterized relationships between hospitals and orthopedic surgeons. Dependencies have developed by both physicians and hospitals on suppliers of products used in surgery. Doctors may need to reevaluate their roles, according to the researchers.

    “The challenge for the profession is to redefine professionalism, accountability, and autonomy in the face of these changes and challenges,” Schneller and Wilson write. What is ideal, of course, is for suppliers to want to compete on the basis of the value they bring through various support efforts as well as demonstrated quality of their product.

    Schneller maintains that hospitals could benefit by reaching out to physicians, inviting them to become partners in improving healthcare supply chains. Doctors are responsive to well-presented, reliable information about products, he says.

    Up from the basement

    The recession has created both challenges and opportunities for those overseeing supply chains in healthcare, according to researchers. With budgets tight, hospitals must monitor closely where savings can be achieved and are increasingly looking to supply chain.

    With more medical records becoming electronic, some paper materials are redundant, the researchers say. And some items used in medical procedures can be reused, saving hospitals up to a million dollars a year and reducing waste going to landfills, according to Wilson and Schneller.

    “It has been said that the recession is the hospital administrator’s best friend — or the supply chain manager’s best friend,” Schneller says.

    According to Wilson and Schneller, supply chain management in healthcare is finally coming out of the hospital basement, where it has been relegated for years. In many hospitals, the manager of supply chain is being given the title of vice president, Schneller notes. Wilson says that people throughout the healthcare field are recognizing the benefits of managing supply chains efficiently and effectively.

    “This is a critically important area because it highly impacts patient care,” Wilson says. “High quality care is the number one goal for everyone.”

    Bottom Line:

    * Supplies are the second leading cost to hospitals after labor in providing patient care. Managing supply chains in healthcare is been a neglected area in efforts to improve efficiency and save costs.
    * Researchers at the W. P. Carey School of Business, working in collaboration with key players in the industry, are exploring ways to improve the efficiency of supply chain management in healthcare.
    * The Health Sector Supply Chain Research Consortium is the only structured academic program in the United States focused on healthcare supply chains.
    * Some of the leading companies in U.S. and regional healthcare are members of the consortium. They include Catholic Health Initiatives, Hospital Corporation of America, Ministry Health Care, Premier and Scottsdale Healthcare; as well as group purchasing organizations GHX, Novation, Owens & Minor and Yankee Alliance; and software and business intelligence company Craneware.
    * As the consortium expands its collaboration with the supplier community, a greater emphasis will be on the ability of supply channel partners to craft “win-win” solutions.
    * The biggest supply costs to hospitals flow from so-called “supply-intensive admissions,” typically orthopedic or cardiac procedures involving artificial joints, implants and stents. Standardizing some of these supplies could bring hospitals substantial savings.
    * Gainsharing is a way of aligning the interests of hospitals and doctors. In gainsharing, hospitals reward doctors for efficiencies by sharing some of the money saved.
    * Improving health sector supply chains requires physicians, hospitals, and others in the healthcare field to reassess the roles and collaborative efforts.

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    Posted in Healthcare, Improvement, Kaizen, Supply Chain Management | 71 Comments »

    How Toyota uses 5s

    March 8th, 2010

    5s in 5 minutes

    Developed in Japan, this method assume no effective and quality job can be done without clean and safe environment and without behavioral rules.

    The 5S are five action verbs (Sort, Clean, Set in order, Standardize and Progress), all starting with an S in Japanese (Seiri, Seiton, Seiso, Seiketsu, Shitsuke). The name “Five S” now identify this method.

    The 5S allow to set up a well adapted and functional work environment, ruled by simple yet effective rules.

    5S deployment is to be done in a logical and progressive way. The 3 first S are shop floor actions, while the 2 lasts are sustaining and progress actions.

    Apparently simple, the 5S are a consistent and powerful set. Their correct deployment allows change and progress far beyond just perform cleaning (or order the cleaning to be done).

    5S are the solid base, the foundation on which to build continuous improvement, install lean manufacturing tools and methods. They are also an effective lever for change management and empowerment.

    Efficient work and quality require clean environment, safety and discipline.
    5S are simple, effective rules for tidiness.

    Principle of 5S

    The 5S are prerequisites for any improvement program. The basic assumption states “wastes are potential gain, eliminating wastes is a gain”.
    The 5S philosophy is a way of thinking, focusing on effective work place organization, simplified work environment, strives waste reduction while improving quality and safety.
    There is no chance for efficiency or quality improvement within dirty work place, waste of time and scrap.

    The five S stand for the five first letters of these Japanese words:

    Meaning

    Seiri Sorting Out
    Seiton Systematic Arrangement
    Seiso Spic and Span
    Seiketsu Standardizing
    Shitsuke Self-discipline

    It is recommended to start implementing 5S in a well chosen pilot workshop or pilot process, and spread to the others step by step.

    Lets see how Toyota does

    PS. I got the pictures from this site excellent blog about TQM.

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    Posted in 5S, Improvment, Kaizen, Quality, Supply Chain Management, Toyota | 70 Comments »

    Value Stream Mapping method – Ohno, Shingo 5s Identifying and decreasing waste

    March 8th, 2010

    0220250801003

    The Value Stream Mapping method (VSM) is a visualization tool oriented to the Toyota version of Lean Manufacturing (Toyota Production System). It helps to understand and streamline work processes using the tools and techniques of Lean Manufacturing. The goal of VSM is to identify, demonstrate and decrease waste in the process. Waste being any activity that does not add value to the final product, often used to demonstrate and decrease the amount of ‘waste’ in a manufacturing system. VSM can thus serve as a starting point to help management, engineers, production associates, schedulers, suppliers, and customers recognize waste and identify its causes. As a result, Value Stream Mapping is primarily a communication tool, but is also used as a strategic planning tool, and a change management tool.

    In order to do this, the Value Stream Mapping method visually maps the flow of materials and information from the time products come in the back door as raw material, through all manufacturing process steps, and off the loading dock as finished products.

    Mapping out the activities in the manufacturing process with cycle times, down times, in-process inventory, material moves, information flow paths, helps to visualize the current state of the process activities and guides towards the future desired state.

    The process usually includes the physically mapping of the “Current State” while also focusing on where you get to, or the “Future State” map, which can serve as the foundation for other Lean improvement strategies.

    History of VSM: The use of waste removal to drive competitive advantage inside organizations was pioneered in the 1980s by Toyota’s chief engineer, Taiichi Ohno, and sensei Shigeo Shingo and is oriented fundamentally to productivity rather than to quality. The reason for this is thought to be that improved productivity leads to leaner operations which help to expose further waste and quality problems in the system. Thus the systematic attack on waste is also a systematic assault on the factors underlying poor quality and fundamental management problems. The seven commonly accepted wastes in the Toyota production system were originally (reformulation by Jones between brackets):

    1. Overproduction (faster-than-necessary pace)
    2. Waiting
    3. Transport (conveyance)
    4. Inappropriate processing
    5. Unnecessary inventory (excess stock)
    6. Unnecessary motion
    7. Defects (correction of mistakes)

    Peter Hines and Nick Rich have suggested the following Seven Value Stream Mapping tools (Article: “The seven value stream mapping tools” – International Journal of Operations & Production Management, Vol. 17, No. 1, 1997, pp. 46-64.):

    1.Process activity mapping {Origin: Industrial Engineering}
    2. Supply chain response matrix {Origin: Time compression/logistics}
    3. Production variety funnel {Origin: Operations Management}
    4. Quality filter mapping
    5. Demand amplification mapping {Origin: Systems Dynamics}
    6. Decision point analysis {Origin: Efficient Consumer Response/logistics}
    7. Physical structure mapping

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    Posted in 5S, Improvment, Kaizen, Management Philosophy, Quality, Supply Chain Management, Toyota | 70 Comments »

    The Presentation Secrets of Steve Jobs

    February 25th, 2010

    Steve Jobs does not sell computers; he sells an experience. The same holds true for his presentations that are meant to inform, educate, and entertain. An Apple presentation has all the elements of a great theatrical production—a great script, heroes and villains, stage props, breathtaking visuals, and one moment that makes the price of admission well worth it. Here are the five elements of every Steve Jobs presentation. Incorporate these elements into your own presentations to sell your product or ideas the Steve Jobs way.

    1. A headline. Steve Jobs positions every product with a headline that fits well within a 140-character Twitter post. For example, Jobs described the MacBook Air as “the world’s thinnest notebook.” That phrase appeared on his presentation slides, the Apple Web site, and Apple’s press releases at the same time. What is the one thing you want people to know about your product? This headline must be consistent in all of your marketing and presentation material.

    2. A villain. In every classic story, the hero fights the villain. In 1984, the villain, according to Apple, was IBM (IBM). Before Jobs introduced the famous 1984 television ad to the Apple sales team for the first time, he told a story of how IBM was bent on dominating the computer industry. “IBM wants it all and is aiming its guns on its last obstacle to industry control: Apple.” Today, the “villain” in Apple’s narrative is played by Microsoft (MSFT). One can argue that the popular “I’m a Mac” television ads are hero/villain vignettes. This idea of conquering a shared enemy is a powerful motivator and turns customers into evangelists.

    3. A simple slide. Apple products are easy to use because of the elimination of clutter. The same approach applies to the slides in a Steve Jobs presentation. They are strikingly simple, visual, and yes, devoid of bullet points. Pictures are dominant. When Jobs introduced the MacBook Air, no words could replace a photo of a hand pulling the notebook computer out of an interoffice manila envelope. Think about it this way—the average PowerPoint slide has 40 words. In some presentations, Steve Jobs has a total of seven words in 10 slides. And why are you cluttering up your slides with too many words?

    4. A demo. Neuroscientists have discovered that the brain gets bored easily. Steve Jobs doesn’t give you time to lose interest. Ten minutes into a presentation he’s often demonstrating a new product or feature and having fun doing it. When he introduced the iPhone at Macworld 2007, Jobs demonstrated how Google Maps (GOOG) worked on the device. He pulled up a list of Starbucks (SBUX) stores in the local area and said, “Let’s call one.” When someone answered, Jobs said: “I’d like to order 4,000 lattes to go, please. No, just kidding.”

    5. A holy smokes moment. Every Steve Jobs presentation has one moment that neuroscientists call an “emotionally charged event.” The emotionally charged event is the equivalent of a mental post-it note that tells the brain, Remember this! For example, at Macworld 2007, Jobs could have opened the presentation by telling the audience that Apple was unveiling a new mobile phone that also played music, games, and video. Instead he built up the drama. “Today, we are introducing three revolutionary products. The first one is a widescreen iPod with touch controls. The second is a revolutionary mobile phone. And the third is a breakthrough Internet communications device…an iPod, a phone, an Internet communicator…an iPod, a phone, are you getting it? These are not three devices. This is one device!” The audience erupted in cheers because it was so unexpected, and very entertaining. By the way, the holy smokes moment on Sept. 9 had nothing to do with a product. It was Steve Jobs himself appearing onstage for the first time after undergoing a liver transplant.

    One more thing…sell dreams. Charismatic speakers like Steve Jobs are driven by a nearly messianic zeal to create new experiences. When he launched the iPod in 2001, Jobs said, “In our own small way we’re going to make the world a better place.” Where most people saw the iPod as a music player, Jobs recognized its potential as a tool to enrich people’s lives. Cultivate a sense of mission. Passion, emotion, and enthusiasm are grossly underestimated ingredients in professional business communications, and yet, passion and emotion will motivate others. Steve Jobs once said that his goal was not to die the richest man in the cemetery. It was to go to bed at night thinking that he and his team had done something wonderful. Do something wonderful. Make your brand stand for something meaningful.

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    Posted in Life, Management Philosophy, Steve Jobs | 61 Comments »

    Competition: A Procurement Perspective

    February 23rd, 2010

    Procurement_base
    Author(s):

    Timothy M. Laseter, Ph.D.
    Timothy M. Laseter, Ph.D. teaches at a number of leading business schools, including the Darden Graduate School of Business at the University of Virginia in Charlottesville.

    Raj Sharma
    Raj Sharma is the president of Censeo Consulting Group as well as the Federal Acquisition Innovation and Reform (FAIR) Institute, both in Washington, D.C.

    February 2010, Inside Supply Management® Vol. 21, No. 2, page 18

    How is supplier competition defined in your organization: the right supplier for the need, or for the price?

    Competition has been the linchpin of capitalism since the days of Adam Smith. Indeed, in his groundbreaking book The Wealth of Nations, Smith proclaimed, “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man or order of men.” Competition ensures that economic resources go to the strongest companies and accordingly advance the economy as a whole.

    But competition in the procurement world often focuses on squeezing supplier margins rather than building strong companies. Supply managers pit companies against one another to achieve the lowest prices without sufficient thought to supplier qualifications and the underlying drivers of cost. By employing readily available, self-service reverse-auction technologies, the buyer can easily include global suppliers with the goal of pushing the current suppliers to bid down to variable cost.

    At the other extreme, supply managers emphasize long-term relationships and forego competition in exchange for cooperation. Taking inspiration from the success of Japanese manufacturers like Toyota and Honda, these purchasing professionals seek to reduce the supply base to a few “supplier partners” that collaborate on waste elimination. Unfortunately, the quest for a reduced supply base usually leads to a focus on large suppliers that can cover a broad geographic and/or product-service scope rather than the best supplier for the specific location or need.

    Though the “invisible hand” of competition remains the linchpin of capitalism at a macro level, supply management professionals need to employ a more visible competitive approach focused on building the right supply base. Competition within the wrong supply base does not produce the lowest cost or prices; in the worst case, it can yield supplier bankruptcies, which put the supply management organization at risk. The most effective companies build a competitive supply base, not simply a competitive buying process. The latter is fairly straightforward; the former requires real skill.
    The Cyclical Nature of Supplier Competition

    A focus on supplier competition tends to run in cycles within the procurement community. Consider the automotive sector over the past 30 years as an example. In 1992, Jose Ignacio Lopez de Arriortua became the head of the General Motors (GM) Worldwide Purchasing Group, with a clear mandate to enhance competitive pressure on GM’s traditional supply base. Lopez had gained the notice of GM’s CEO Jack Smith through his success in reigniting competition among the stagnant and, at times, cozy relationship between GM and its European suppliers.

    Lopez called together the company’s top suppliers (mostly U.S.-based organizations) and dramatically tore up a contract in front of the room. Lopez explained that past relationships meant nothing. Suppliers needed to compete for the US$50 billion that GM purchased each year. Though Lopez helped drive a billion dollars in savings to the bottom line of GM, a backlash ensued. Suppliers complained that GM pitted them against unqualified suppliers to drive down their pricing. Others noted that while they continued to sell to GM, they now took their best ideas to GM’s competitors — including Japanese transplants Toyota and Honda.

    Over time, the automotive supply base diversified its customer base away from the “Big Three” of General Motors, Ford and Chrysler (which today are known as the “Detroit Three”). Suppliers such as Johnson Controls began to serve the full suite of global vehicle producers and also acquired competitors to lessen their dependency on the likes of GM. In the mid-1990s, 31 suppliers accounted for 50 percent of automotive parts sales, but by the early part of this decade, the number had dropped to a mere 10 suppliers. Clearly, larger suppliers that have a broader customer base feel less pressure from any single customer — and, accordingly, simple price competition proves less effective.

    Supplier collaboration came to dominate the supply management world at many companies during the early part of this decade. This became especially true as commodity prices shot through the roof due to growing demand from China. Supply managers became less concerned about price and, instead, simply sought continuity of supply at any price. Of course, commodity prices cycle, and the recent recession has shifted the supply and demand balance back in favor of the buyer. As such, supplier competition is on the rise again.

    Unfortunately, supplier bankruptcies are also on the rise. According to U.S. Bankruptcy Court data, bankruptcy filings in 2008 totaled 44,000 — up 57 percent over 2007. Dun & Bradstreet suggests that the government numbers dramatically underestimate the true total. Considering the full collection of businesses in its database, the total business failures probably topped 110,000 in 2008. Though official numbers for 2009 are not yet in, a twofold increase in bankruptcies over two years seems likely. Arguably, such failures offer evidence of the “invisible hand” at work driving the economy forward at the macro level over the long term. But, as an individual company or supply management professional, dependency on a bankrupt supplier can put a business at risk or, at a minimum, wipe out those savings squeezed from the supplier margins.

    Portending another iteration of the cycle, the federal government, which purchases more than $500 billion in goods and services annually, has highlighted the need to increase competition as a core tenet of procurement reform. On March 9, 2009, the Obama administration issued a presidential memorandum to the heads of all government agencies highlighting its concern over the growth of sole-source contracts and a decrease in competition for government work. Recent guidance emphasizes processes for increasing competition but does not clearly address a key issue: Barriers to entry sometimes limit the ability of the most qualified suppliers from competing.
    From Competitive Bidding to a Competitive Supply Base

    Whether you are a commercial enterprise or the federal government, the goal should not be to create a more competitive bidding process. Instead, the goal should be to create a dynamic, competitive supply base. Free and open competition can help… but only in the right context.

    Ensuring a competitive supply base requires four fundamentals. Without them, competitive bidding can do as much harm as good:

    1. Understand the sources of value creation.
    2. Find and attract the best suppliers.
    3. Align incentives to create value.
    4. Collaborate to achieve results.

    Understand the sources of value creation. Before launching any form of competitive bid, supply managers need to focus on two critical activities. First, they must define the product or service requirements by truly understanding the performance objectives of the customer (either external, but more likely internal). Second, supply management professionals must understand the sources of value creation based not only upon customer needs but also supplier cost drivers. Too often, supply managers simply start with written specs but lack a deep understanding of the need or the drivers of the requirements. For example:

    * An automotive brakes supplier specified full paint coating for all of its springs. Upon investigation, the supplier explained that paint did not provide the desired rust protection once the spring was installed, and that an oil dip would be more effective and less costly.

    * In the services sector, maintenance contracts often set a service level for parts availability without an appreciation of the real cost of the downtime. At an oil company, certain equipment failures, such as a main production pipeline, could shut down the entire operation at an enormous cost. But for other equipment, such as a single wellhead (a pressure-containing component), downtime can be less costly as the oil pools during the shutdown and flows at an above-average rate for some time once the equipment starts up again.

    Find and attract the best suppliers. Understanding the drivers of requirements and sources of value requires a supply manager with deep knowledge of the product or service and the supply base. Supply management professionals must work closely with customers to understand their needs and then go into the field to find the best suppliers. Too many supply management professionals simply reach out to the same set of suppliers. Though such bidding may give the impression of competition, it tends to be an illusion. For example, “full and open competition” in the government often results in the same set of players, not necessarily the most qualified in the industry, competing for government work. It can be hard for supply managers to attract the most qualified suppliers due to the burdensome regulations imposed by Federal Acquisition Regulations (FAR). No amount of bidding will help if the competition exists among noncompetitive suppliers. On the opposite end of the spectrum, when Honda built its first U.S. manufacturing plant in Marysville, Ohio, supply managers visited hundreds of suppliers, seeking those with the right technology, and more important, the right management commitment to become world-class suppliers.

    Align incentives to create value. Once a company has attracted the best suppliers based upon an understanding of the true requirements and sources of value, the challenge becomes aligning incentives to capture the value — which can include incentives within the organization as well as across the supply chain. Many supply management professionals stick with the same suppliers because their internal customers insist that no one knows the company like the incumbent. Competition among suppliers can provide a serious “stick,” but a “carrot” can also be effective. Rather than constantly bidding out work in hopes of finding better suppliers, the best companies set long-term improvement goals for the supplier and share the savings. Of course, setting realistic goals and capturing your share of the value depends upon that deep understanding of the requirements and the sources of value.

    Collaborate to achieve results. Finally, let’s not forget that a competitive supply base requires ongoing collaborative work. Supply managers who assume their job is done upon contract award will not build the best supply base. Instead, leading companies select their supplier strategically — that is, with a long-term perspective — and then take a long-term view to develop that supply base. They invest in shared cost reduction, joint product development and collaborative planning.

    Take the infamous case of the cancelled presidential helicopter in 2009. The contract was awarded through a competitive bid between Sikorsky and a consortium comprised of many European companies — because no other combination could conceivably produce the design, which represented a major step-function advancement over the existing Marine One fleet. Unfortunately, the selected consortium was unable to meet promised milestones and cost targets, which were probably overly ambitious to start with. A lack of competition was not the issue, but rather an inability to collaborate to produce a feasible design at an agreed target cost.

    Ongoing efforts working with strategic suppliers deepen supply management professionals’ knowledge of the sources of value from the supply base, which reinforces the four fundamentals and reduces the necessity for the relatively crude tool of price-based competition.
    Driving Change

    Competition is necessary, but by itself is not sufficient. Even the Japanese leaders in supplier collaboration maintain more than one supplier for a given commodity. Competitive tension certainly prevents complacency among the supply base. But, a single-minded focus on competition — particularly among a marginal supply base — can wreak havoc by forcing suppliers to cut corners at best or put them out of business at worst. To manage the balance, organizations need to move toward a focus on creating a competitive supply base rather than creating a competitive bidding process. The distinction is far from trivial.

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    What Can We Learn from Red Bead Experiment

    January 19th, 2010

    LESSONS LEARNED FROM THE RED BEAD EXPERIMENT

    1) It’s the system, not the workers. If you want to improve performance, you must work on the system.

    Red beads were the result of a bad system; the Willing Workers were not the problem. The system is the problem. Dr. Deming stated 94 percent of the problems come from the system rather than the worker. Yet most efforts at improvement are aimed at the worker.

    2) Quality is made at the top. Quality is an outcome of the system. Top management owns the system.

    The systems developed by top mangers of an organization have far greater impact on the success of the organization than the best efforts exerted by Willing Workers. The decision to produce white beads in the first place; the decision to purchase beads from a particular supplier; the decision to use rigid procedures; and the decision to rely on mass inspection – all these decisions made by top management resulted in a system that contributed more than the Willing Workers to the waste, the lack of quality, and to going out of business.

    3) Numerical goals and production standards can be meaningless. The number of red beads produced is determined by the process, not by the standard.

    The production standard of three red beads per day was impossible to achieve. The Willing Workers could not affect the number of beads produced; meeting the standard was beyond their control. The “Voice of the Customer”, translated by management into a goal of 3 red beads or less, had no effect on the number of red or white beads produced. No method was given.

    Even if the goal is “possible”, there is little to be gained by announcing such a goal to the workforce. If the goal is based upon what you expect can happen, then 50% of the time you will come in better than the goal, and 50% of the time you will come in worse (and set yourself up for failure). If you “pad” the goal to provide a margin for expected fluctuations in results, then the goal probably is no longer “challenging”.

    If higher quality standards are required – a lower defect rate, for example – then the production process must be improved to achieve the standard. Management must provide the method.

    4) Rewarding or punishing the Willing Workers had no effect on the outcome. Extrinsic motivation is not effective.

    Rewarding or punishing the Willing Workers had no effect on red bead production. Fear was not the answer.

    All the red beads produced were an outcome of the system’s performance, not the individual Willing Workers. Yet the Foreman gave bonus pay and put people on probation supposedly as rewards and punishment for performance. The Foreman was actually rewarding and punishing the performance of the process, not the Willing Workers.

    Quality is achieved when workers have “Joy in Their Work” – are motivated from within (intrinsic motivation), not by rewards or punishment.

    5) We can use statistics to create a quality control chart and look for problem areas and to predict future performance.

    Development of a Statistical Process Control (SPC) control chart with control limits will show us if our production system is stable – working in a state of control. If the system is stable, we can predict future performance with some certainty.

    The red bead production system turned out to be stable – all points within the upper and lower control limits. The variation and level of output of the Willing Workers, under continuance of the same system, were predictable. Costs were predictable.

    6) A faulty item is not a signal of “special” causes. A process can be stable, in-control and be producing 100 percent defective items. “Defects” are defined by specification, not by process.

    The production system produced about 10 red beads or defects per run. Yet the entire process was working in a state of control. The red beads produced were not a signal of special cause. The varying number of red beads produced in each run was caused by random variation – pure chance.

    It is wrong to assume that every faulty item, any failure, and any problem is due to special causes and that corrective action is required. This type of thinking results in fire-fighting with no permanent improvement achieved. We may reward fire-fighters, but most fire-fighters fall into the trap of being so caught up in the fire fighting that they allow other fires to start.

    Defects may result from random variation of a stable process that is capable of achieving the required specifications – an incapable process. We must improve the process to produce a product meeting specifications.

    7) Rigid and precise procedures are not sufficient to produce the desired quality.

    The Willing Workers followed the procedures prescribed by the foreman. “Procedure compliance is mandatory.” Despite following rigid procedures, quality was not achieved. The Willing Workers had no chance to offer suggestions for process improvement. Too many red beads were produced – the plant closed down.

    The entire workforce must be engaged in process improvement in order to help get rid of the red beads, to stay in business and to create more jobs. Everyone has an obligation to improve the system, and thus to improve his own performance and everyone else’s. The Willing Workers were victims of the process. They could not, under the rules laid down by the foreman, improve their performance.

    Only management can change a system or empower employees to change the system. Dr. Deming asked, “How can a man (or woman) do it right the first time when the incoming material is off gauge, off color, or otherwise defective, or if his machine is not in good order?”

    8) Keeping the place open with only the “best” workers was acting on “superstitious” knowledge.

    Management acted on the outcome of the process itself. Acting without clear evidence, management believed the “best” workers in the past would be the “best” workers in the future. Differences in red bead production were due entirely to the process, not to differences in the Willing Workers.

    “What is the purpose of management?” Dr. Deming asks. “Not to play games but to use numbers so that we can predict the future.”

    9) Management was “tampering” with the system by rewarding and punishing the Willing Workers.

    To react to an outcome as if it came from a special cause when it actually came from a common cause of variation is “tampering” with the system.

    Action taken on a stable system in response to variation within the control limits, in an effort to compensate for this variation, is tampering. Tampering will inevitably increase the variation and increase costs. This advice holds even if the stable system is producing faulty items.

    Rewarding and punishing Willing Workers for perceived good and bad performance is tampering with the system. When errors go down, we give a bonus, or maybe we give a pizza party. We determine which workers have the highest error rate and then we take corrective action – discipline or termination. This practice is wrong – even worse, it is destructive.

    10) People are not always the dominant source of variability.

    All the variation – differences between Willing Workers in the production of red beads, and the variation day to day of any Willing Worker – came entirely from the system itself. There was no evidence that any one worker was better than another. Variation is part of any process. Even with identical or similar tools, tasks, and talents, production will vary. There is always variation.

    The system consisted of the vessels, paddle, red beads, white beads, instructions and procedures. The environment, equipment, materials and procedures all contribute to variation. The Willing Worker becomes part of the system subject to variation. The Willing Workers had put into the job all that they had to offer. They could not, under the circumstances, do better. The variation in performance arises from the system itself, not from the Willing Workers.

    In the Red Bead Experiment Dr. Deming has purposefully eliminated the source of variation that many think is always the dominant source: that is, the people.

    The common wisdom is that if only people did not make so many mistakes, there would not be so many problems. But even with the variation contributed by the people reduced to zero, there are still too many red beads.

    11) Slogans, Exhortations and Posters Are At Best Useless To The Willing Worker.

    Motivational posters had no effect on red bead production.

    Slogans like “Do it right the first time” are an insult. Exhortations and posters generate frustration and resentment. They advertise to the production worker that management is unaware of barriers to pride of workmanship.

    If we have set up our business correctly, “it” will be done right the first time. In that case the slogan is useless.

    If we did not set it up correctly, there is nothing that the Willing Worker can do to make it right the first time. If we didn’t set up the business properly, a slogan such as this will only frustrate the worker. If the worker tries to make changes, he can only make the result worse by tampering.

    Thoughts from a Willing Worker named Ann. A Willing Worker named Ann, after the experiment on the Red Beads came to a close, expressed to Dr. Deming some provocative thoughts. She wrote her thoughts down in the following letter:

    When I was a Willing Worker on the Red Beads, I learned more than statistical theory. I knew that the system would not allow me to meet the goal, but I still felt that I could. I wished to. I tried so hard. I felt responsibility: others depended on me. My logic and emotions conflicted, and I was frustrated. Logic said there was no way to succeed. Emotion said that I could by trying.

    After it was over, I thought about my own work situation. How often are people in a situation that they can not govern, but wish to do their best? And people do their best. And after a while, what happens to their drive, their care, and their desire?

    (From The New Economics by W. Edwards Deming)

    RED BEAD EXPERIMENT RESOURCES

    From the Master:

    1) Out of the Crisis, by W. Edwards Deming
    Published by the Massachusetts Institute of Technology, 1986
    Center for Advanced Engineering Study, Cambridge, A 02139

    2) The New Economics For Industry, Government, Education, by W. Edwards
    Deming.
    Published by the Massachusetts Institute of Technology, 1993
    Center for Advanced Engineering Study, Cambridge, A 02139

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    Posted in Improvement, Management Philosophy, Supply Chain Management | 61 Comments »

    Deming’s 14 points

    January 19th, 2010

    deming

    The 14 points for management (Out of the Crisis, Ch.2) in industry, education and government follow naturally as application of this outside knowledge, for transformation from the present Western style of management to one of optimization.

    Origin of the 14 points.
    The 14 points are the basis for transformation of American industry. It will not suffice merely to solve problems, big or little. Adoption and action on the 14 points are a signal that the management intend to stay in business and aim to protect investors and jobs. Such a system formed the basis for lessons for top management in Japan in 1950 and in subsequent years (see pp. 1-6 and the Appendix).

    The 14 points apply anywhere, to small organizations as well as to large ones, to the service industry as well as to manufacturing. They apply to a division within a company.

    The 14 points.

    1. Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs.
    2. Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.
    3. Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.
    4. End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.
    5. Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.
    6. Institute training on the job.
    7. Institute leadership (see Point 12 and Ch. 8). The aim of supervision should be to help people and machines and gadgets to do a better job. Supervision of management is in need of overhaul, as well as supervision of production workers.
    8. Drive out fear, so that everyone may work effectively for the company (see Ch. 3).
    9. Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.
    10. Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.

    * Eliminate work standards (quotas) on the factory floor. Substitute leadership.
    * Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.

    11. Remove barriers that rob the hourly worker of his right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality.
    12. Remove barriers that rob people in management and in engineering of their right to pride of workmanship. This means, inter alia, abolishment of the annual or merit rating and of management by objective (see Ch. 3).
    13. Institute a vigorous program of education and self-improvement.
    14. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.

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    Kaizen and the Supply Chain

    December 11th, 2009

    kaizen
    As I mention before, Kaizen is a Japanese term which means “continuously improvement”, and a Japanese philosophy. When I was in Japan, I was able to see their work ethics. Hands down not only they work really hard, but also they work systematically and respectfully.

    One of the things that impressed me about Japanese work environment was each worker from CEO to cleaning person makes himself or herself attached to the company. What I mean when they start working, they become a part of the company. If you ask a production engineer in USA What are you doing? The answer you will hear will be that I am an production engineer in GM,Ford or etc. However if you same question in Japan. the answer will be i work for Toyota or I work for Fujitsu…

    Anyway, any company that practices kaizen is making small changes for the better on an ongoing basis- this is commonly called continuous improvement. Over the past 15 to 20 years, kaizen has become synonymous with the kaizen event, a focused improvement “blitz” in which a team works to improve (i.e., kaizen) a process. These are actually quite different. While the kaizen event is a still a very useful tool for improving points in a value stream, the term “kaizen” refers to a way of thinking, not a single tool.

    Practicing kaizen means eliminating waste. Toyota’s Taichi Ohno identified the “seven wastes” of manufacturing as:

    Overproduction
    Waiting
    Processing
    Motion
    Inventory
    Transportation
    Defects
    If a company is truly practicing kaizen, every employee from the shop floor worker to the CEO is working to eliminate waste on a daily basis.

    But how do we approach kaizen for an entire supply chain? If within a single organization, we are asking each employee to think lean and to eliminate waste, then within the supply chain we must ask each organization to do the same. However, simply performing kaizen within the individual companies comprising a supply chain is not sufficient. Not only must we ask them to begin practicing kaizen within their four walls, we must work on supply chain improvement as a whole. This is because there are often wastes within a supply chain that we can only see when we consider the entire supply chain rather than simply one organization or process within it.

    So, we’ve determined that we need to kaizen both the supply chain as a whole as well as the individual organizations and processes within it. What are the tools that help us accomplish this?

    1. Value Stream Mapping. Value stream mapping helps us to see the entire picture and identify changes (kaizen) that will improve the supply chain as a whole. Through VSM, we understand the sources of waste created within material and information flows.

    2. Supplier Associations. Supplier associations help improve communication and knowledge across a supply chain, thus enabling kaizen throughout the supply chain.

    3. Kaizen Events. Kaizen events can help us implement improvements to particular points within the value stream.

    4. Other Kaizen/Lean Tools. All of the traditional lean tools such as Standardized Work, One Piece Flow Cells, Kanban/Pull, Visual Controls, Quick Changeover/Single Minute Exchange of Die (SMED), 5S, Total Productive Maintenance, and others can help improve a supply chain.

    Each of the above works together to kaizen an entire supply chain.

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