Category: Operations

Personal Strategies for Adding Value

tomkapostasyLeave a comment

The Great Recession has expedited the transition to a virtual labor market, where each individual is an independent contractor constantly in the market, selling their services.  To succeed in this world, individuals need to define their product, sharpen their sales skills, actively manage their time and add greater incremental value.

The 12 million unemployed Americans are bombarded with advice on defining their personal brand.  Setting aside the gloss and polish offered by career counselors, the remaining content is the need to be easily defined in a 15 second elevator speech.  Simple and specialized products sell.  Complex and generic products die.  Specialized professional functions and industry experience are marketable.  Generalists need to become repositioned with specialist labels: as entrepreneurs, six sigma black belts, project management professionals, etc.  Certifications are highly valued.  The “signaling” theory of the labor market is winning, with HR, hiring managers and recruiters all relying upon external signals such as certifications, national/Big 4 consulting experience, top 25 university/MBA degrees and Fortune 500 experience.  Personal communications and sales skills command a premium within the universe of certified professionals.

At work or as a consultant, the most important driver of added value is the allocation of time.  Individuals divide their time among the functions of doing, managing, investing, planning and reporting.  Stephen Covey’s path breaking “Seven Habits of Highly Successful People” enlightened a whole generation on this topic.  There is a critical trade-off between doing and other functions, which senior staff and managers must exploit.  There is a trade-off between urgent and important tasks at the heart of personal time management.  There is value in “sharpening the saw” by investing in activities with long-run benefits. 

The marginal product theory of labor value applies at work.  Individuals who devote their time to the highest incremental value activities at work are rewarded.  Those who do their “fair share” of low value activities are left behind.  Managing people, suppliers, customers, assets, risks and processes offers opportunities to leverage value.  Individuals with the greatest scope of authority deliver the greatest value and are rewarded.  Investing in people, products, processes and assets provides another opportunity to add greater value.  Strategic, functional, project and individual planning offers opportunities to leverage time in a more abstract dimension.  Developing, operating and enhancing reporting and feedback systems allow key staff to identify enhanced improvement and risk management options. 

Individuals who have managed to define and sell their personal branded product and secured significant opportunities to deliver value must also know how to deliver incremental value.  There are seven generic strategies for adding maximum value.

Buy low and sell high.  All activities must be delivered by the lowest cost resource.  If there is any individual, machine or supplier that can deliver a service more cheaply, eventually they will.  Identify the lowest cost resource and employ it.  Delegate.  Divide jobs.  Outsource.  Automate.  Simplify.  As Andy Grove once said, “only the paranoid survive”.  Get this done before others.

Match skills and talents to assignments.  Functional skills, industry experience, soft skills, courage, flexibility, creativity and other talents vary greatly across available resources.  Identify the 3-5 key talents required and employ those with natural talents.  Employ personality profiles, test results and Gallup Strengths to find matches.  Create an internal labor market that encourages staff to know and apply their talents as often as possible.

Leverage the cumulative positive impact of process engineering.  Call it TQM, ISO 9000, six sigma or lean manufacturing.  Employ incremental continuous process improvement, tactical Kaizen blitzes, re-engineering projects, management systems and cultural changes to obtain the maximum value from the quality revolution.  World-class firms continue to improve and leave others behind.

Leverage the benefits of learning curves in all activities.  Individuals with one year of experience may be twice as productive as trainees.  Those with three years of experience may be another 50% more productive.  Reach mastery level in critical activities. 

Create synergy through cross-functional project teams.  There is a limit to the returns on the first four strategies.  Eventually, a senior financial analyst, research chemist or national accounts manager will find incremental improvements more difficult to achieve.  For some projects, processes and functions there is a need to combine the highest talents of complementary functions. 

Leverage the unique assets of the organization.  Firms have core competencies, intellectual property, cultural assets, brand assets, relationships, best practices and most productive assets.  Sales or product growth in adjacent space has a high success probability.

Leverage the organization’s goodwill with stakeholders.  Suppliers, customers, regulators, investors, staff and communities have a vested interest in the organization’s ongoing success.  Provide them with opportunities to reinvest in the organization’s future.

Most of us will add the greatest possible value by following the path of least resistance.  We will leverage relative market values, talents, process improvement techniques, learning curves, teamwork, core competencies and common interests.  A self-aware, proactive strategy will pay the greatest personal dividends, while delivering value to firms and society.

What Customers Really Want

tomkapostasy1 Comment

As organizations and organizational units adopt more customer-focused strategies, there is a need to better understand what customers really want.   Although firms can invest years and decades in marketing research on this question, they can also choose to obtain 90% of the value in a single day by facilitating an honest discussion with key leaders and customers.

 Those who have adopted the quality/process view believe that the first step is to confirm that customers mostly (only) care about the perceived value of final results.  They will pay for a value added process or feature, but don’t care about other activities.  Richard Schonberger proposed that all customer needs can fit into a small number of categories, which can be used to define and prioritize the findings.

Customers value final product or service quality.  More today than before; and more tomorrow than today.  Some customers value process quality, because it reduces their risk, serves their customers or is required by regulators.  What quality level is required to remain in business, to meet expectations or to differentiate a product?

Customers value delivery speed.  Product lead times have fallen from weeks to days to hours to minutes.  Service delivery is sometimes measured in seconds. 

Customers value flexibility.  They expect your firm to have the capacity to meet their orders within standard lead times.  They expect you to make exceptions.  As in the Pink Panther movies, they may agree to a standard lead time or capacity, but when they need an exception, they want you to ignore what they told you before.  Expectations regarding flexibility vary widely across industries and firms and can change rapidly.

Customers seek value.  They want lower prices or total cost of ownership.  They want features and benefits that are cost-effective, which meet their needs or which are market leading.  This is a very broad category, but firms must operate with some understanding of what is expected.

Customers value information.  They want business relations with clear information flows, minimal transaction costs and shared accountability for risks.  Ideally, you anticipate and fulfill their needs in a cost free way, without surprises and take care of surprises of all kinds: regulatory, supplier, customer, competitor, acts of god, etc.

Finally, customers value personal relationships.  This varies by culture, industry, firm and purchasing agent.  Business relations are rarely purely business relationships.  Personal connections, loyalties, favors, culture and understanding often matter.

Firms or business units should understand what their customers want.  They should identify minimal, expected and differentiated performance levels.  They should understand relative customer priorities.  This may require formal marketing research or trial policies or pricing exercises to determine real preferences.  This may require sales, marketing, engineering, production and finance to work together like never before.

A consensus one-page QSFVIP customer profile can help to shape decisions at the strategic and tactical levels.

Project Opportunity Analysis Template

tomkapostasyLeave a comment
    Opportunity Analysis – Name of Project
     
    1. Key Strategic Priority Areas/Critical Success Factors
10 A Creatively addresses more than one of the nine key strategic priority areas.
7 B Directly targets a significant improvement in one key strategic priority area.
3 C Contributes to the achievement of one key strategic priority area.
  D Provides benefits, but does not address any of the nine key strategic priority areas.
     
    2. Annual Strategic Plan
10 A An integral and significant preplanned component of the annual strategic plan.
7 B An initiative within the annual plan.
3 C Consistent with focus areas of the plan, but not defined as a planned initiative.
  D Provides benefits, but is not connected to the initiatives defined in the plan.
     
    3. Mission, Vision and Precepts 
10 A Creatively addresses more than one precept or component of the mission.
7 B Directly targets a precept or component of the mission.
3 C Contributes to a precept or component of the mission.
  D Provides benefits, but the connection to the mission and precepts is weak.
     
    4. Long-term Strategic Plan
5 A Creatively addresses more than one goal of the plan.
4 B Directly targets a significant improvement in one goal of the plan.
2 C Contributes to the achievement of one goal of the plan.
  D Provides benefits, but does not address specific goals of the plan.
     
    5. Program/Product Portfolio
5 A Builds on an existing area of strength, leveraging a core competency.
4 B Provides services the organization has targeted for growth or improvement.
2 C Addresses an area of weakness considered critical to portfolio of services.
  D Serves a new area, a weak area, or one that de-emphasized.
     
    6. Customer(s) Served
5 A Targeted to serve an existing primary customer group.
4 B Serves a customer group which has been identified for growth potential.
2 C Serves a secondary customer group, by leveraging an existing program.
  D Serves a secondary customer group or channel,  which others could serve as well.
     
    7. Proven Demand for this Service
5 A Members, customers and sponsors have paid for this program before.
4 B Marketing research and tests indicate that this is a top priority service.
2 C Marketing research supports some demand, but dollar value is unproven.
  D Some constituents demand this service, but no research or market proof.
     
    8. Brand Consistency
5 A Service reinforces key brand messages and is promoted with existing vehicles.
4 B Service is consistent with key brand messages, but requires separate promotion.
2 C Service connects with some brand messages and requires separate promotion.
  D Service is not consistent with key brand messages.
     
    9. Delivery Channel Environment
5 A Reinforces historical and current programs and values in delivery organizations..
4 B Consistent with historical programs and values in delivery organizations.
2 C Some degree of innovation or stretch that may be a concern to some players.
  D Innovative program designed to introduce change for delivery partners.
     
    10. Financial Resources
5 A Earns a financial payback of investment in one year or less.
4 B Earns a financial payback in two years or less.
2 C Breaks even in more than 2 years, but provides significant qualitative benefits.
  D Qualitative benefits are deemed to exceed quantitative costs.
     
    11. Sponsor/Funding Resources
5 A Creates a strong opportunity to attract new sponsors and contributions.
4 B An attractive project 80% likely funded in a year, without harming programs.
2 C More than 50% funding chance, but may compete with existing programs.
  D Less than a 50% funding chance or clearly competes with existing programs.
     
    12. Information Technology
5 A Uses existing capabilities without modification.
4 B Uses existing or planned strong capabilities with minor enhancements.
2 C Uses existing capabilities, but requires development outside of current plans.
  D Requires pioneering development work to provide appropriate service.
     
    13. Delivery/Operations/Processing Capabilities
5 A Uses existing strong capabilities without modification.
4 B Uses existing strong capabilities with minor enhancements.
2 C Uses existing capabilities, but requires significant development.
  D Requires pioneering development work to provide appropriate service.
     
    14. Human Resources
5 A Service can be provided by existing staff and structure.
4 B Service requires some additions to staff in existing categories.
2 C Service requires new staff skills and minor adjustments to structure.
  D Service requires major initiatives in recruiting, retention and structure.
     
    15. Monitoring and Evaluation
5 A Success is easily measured by existing measurement and evaluation tools.
4 B Success can be measured with only minor enhancements to current system.
2 C Success can be measured, but will require adjustments to existing measures.
  D Success is difficult, if not cost prohibitive, to measure directly.

Getting Started on Emergency Preparedness

tomkapostasyLeave a comment

We seem to live in a world filled with unpredictable risks: a banking crisis, potential Greek debt default, H1N1 flu, gulf oil spill, Icelandic volcano ash, terrorist attempts, etc.  Many small and medium-sized businesses defer emergency preparedness planning because they are unable to find the handle to get started or they fear a bottomless pit of cost with no expected benefits.  Doing nothing is a choice, but it is not the best choice.

Any firm can complete the first three steps of an emergency preparedness plan in less than one day: outline the potential risks, prioritize their likely impact and outline the required preparedness measures which would address the risks.  Most potential risks are generic.  The attached checklist can be modified to highlight any other risks.

The identified risks can be prioritized through a simple weighting scheme.  For each risk, rank its probability of occurrence in the next 10 years as 1-5, with 5 being highest.  For each risk, separately evaluate the potential human and property/asset risks from 1-5, with 5 being the highest damage.  Calculate the potential impact as the probability score times the SUM of the human and property impacts.  Sort the risks from high to low.  There will be a natural division of scores that highlights your top 5-15 risks.

 For each risk, determine what emergency preparedness steps are required.  Most will be addressed by a small number of generic recovery steps.

  1. Shelter on-site for 4 hours, including emergency air supply.
  2. Shelter on-site for 16 hours, during threatening weather.
  3. Shelter on-site for 72 hours.
  4. Quickly evacuate building and account for occupants.
  5. Activate emergency communications plan/alternate command authority structure.
  6. Activate emergency business recovery plan
  7. Activate long-term quarantine plan.
  8. Other specialized recovery steps.

 Once these first three steps have been completed, progress can begin on developing the recovery plans, including any immediate action steps that can be taken to reduce the risks or impacts of high potential impact threats.

 Emergency preparedness is a major investment.  Getting started is the most important step.

 Group   No.   Risks 
     
 Brand      1  Key executive or representative incident 
 Brand      2  Product recall – safety, functional problems 
 Brand      3  Public relations crisis, fraud, suppliers, legal, political 
     
 Hazard      4  Biological – plague, insects, animals, malaria, anthrax, terror 
 Hazard      5  Chemical – on-site, storage, warehouse, adjacent, terrorist, gas leak 
 Hazard      6  Communicable disease – long-term impact (Avian flu, H1N1 flu) 
 Hazard      7  Explosion – natural gas, terror, plane, truck, car 
 Hazard      8  Fire – on-site, garage, storage, adjacent, roads, utilities 
 Hazard      9  Local  accident, making buildings inaccessible for 30 days+ 
 Hazard    10  Nuclear accident, truck, terror, bomb, other radiation release 
     
 IT    11  Computer virus or malware infection, major 
 IT    12  Major internet access failure for more than 1 day 
 IT    13  Servers and co-location servers destroyed, restart 
     
 Natural    14  Earthquake – structural damage, fire, water, utility damage 
 Natural    15  Flood – on-site, nearby, preventing access 
 Natural    16  Severe winter storm, ice, heavy snow 
 Natural    17  Tornado, high wind storm, hurricane, hail storm, lightning 
     
 Personal    18  Armed threat, violence, hostage, robbery, escapee – nearby 
 Personal    19  Civil disturb, riot, war, occupation – on-site, nearby, country 
     
 Supply    20  Bank, fin system, invest failure, long-term recession 
 Supply    21  Critical supplier, shipper, facility or resource failure 
 Supply    22  Labor supply disruption 
     
 Transport    23  Major loss of staff due to travel accident 
 Transport    24  Major transportation interruption – road, train, air or ship 
 Transport    25  National travel emergency requiring alternate travel
 Transport    26  Vehicles – collision, liability 
     
 Utility    27  Communications, utility service interruption 
 Utility    28  Long-term electrical power outage 
 Utility    29  Safe drinking water failure 

Outsourcing Success

tomkapostasyLeave a comment

After four decades of outsourcing in many functions and industries, it is clear that success requires more than leverage.  Outsourcing success requires a compelling rationale, a clear and flexible framework and positive personal relationships.

The rationale for outsourcing is based upon core competencies, provider capabilities, economics, strategy and fit.

  1. Buyer core competencies can not be outsourced.  The provider must deliver the outsourced function as a true core competency, not just a low price.  The provider is able to own responsibility for the outsourced function.  The provider has world-class skills and invests in improvements.  The provider is well-capitalized and experienced in the customer’s industry.  There is no beta site or learning by doing dimension.
  2. The provider has the skills and culture to be a third-party provider, including a customer service mentality, flexibility, creativity and change management skills wrapped around professional competence.
  3. The contract allows the buyer and provider to both win financially.  The provider is capable of reducing unit costs each year.  The provider’s initial bid and investment make economic sense.  The provider can justify a fully qualified account manager dedicated to making this contract work.
  4. The buyer has a clear strategic reason for outsourcing and has structured the deal to ensure its delivery.  This can be cost, quality, capacity, service, delivery time, risk management, creativity, technology, systems or intellectual property access.
  5. The hand-off from buyer to provider is a good fit.  Either the function can be very well-defined and delegated cleanly or the function is inherently virtual and both firms thrive in a matrix environment.  The buyer emphasizes product innovation or customer intimacy and the provider delivers operational excellence (or some other clear division).  The provider is able to perform in the buyer’s steady state or high growth and change environment.  The provider is comfortable with the buyer’s status in the Fortune 100, Fortune 1000 or middle market world.

 

The framework for an outsourcing agreement is well-defined, flexible, empowering, balanced and aligned.

  1. The contract is detailed, comprehensive and robust and meets the needs of finance, legal and operations.  The strategic objectives and measures of success are clearly defined.
  2. The contract is a model of world-class delegation.  Important results are defined, but the means to achieving them is left to the provider.  Micromanagement and administrivia is avoided like the plague. 
  3. The relationship between single agents for the buyer and provider is clearly defined.  The provider account manager is welcomed as a full business partner on the buyer’s staff.  A competent buyer rep is assigned to manage the contract, with his career depending upon its success.  The two reps are given the authority and flexibility to manage day-to-day issues.  A dispute resolution framework, including billing, is defined.  The contract supports a wide range of operating conditions and triggers for re-opening negotiations.
  4. The provider has adequate capacity and power in the agreement to succeed.  The minimum and maximum volumes are reasonable.  The provider has a fair economic deal and leverage to negotiate as required.
  5. Contract incentives align the interests of the buyer and provider.  The contract provides time for the provider to digest start-up costs and benefit from learning curve effects.  Each side benefits from greatly increased service volume.

 

The relationship between the buyer and provider reflects a true partnership, shared resources, trust, opportunities and planning.

  1. The partnership anoints the provider as the sole provider of services in their category.  The contract gives the provider reasonable security and expectations of ongoing business unless someone clearly outbids them.  The business is not re-bid based upon opportunities.  The business is not divided by high and low margin components.
  2. The buyer and provider work together to find every opportunity to leverage their skills, suppliers and knowledge.  Terms reflect the firm with the lower cost of capital.  Transaction and billing costs are minimized, assuming good faith.  Everything learned in the bidding process is incorporated into the contract.  The contract recognizes that there are inherent trade-offs between costs and services.
  3. A trusting relationship is developed.  The provider is on-site, attends meetings and communicates with the buyer daily.  The provider has a quality management system that provides confidence.  The provider is transparent in sharing information and risks, including competitive intelligence. 
  4. Both parties actively promote win/win opportunities.  The buyer is an active reference for the provider.  The buyer seeks new products, services and applications from the provider at list price. 
  5. The provider is involved in the planning process.  They attend strategic planning meetings.  They get 90 day notice of annual budget targets.  Both parties negotiate annual changes in good faith.

 

Buyers tend to have greater leverage in outsourcing services.  To achieve the best long-term results, they need to negotiate long-term win/win deals with providers.

Prioritize, If You Dare!

tomkapostasyLeave a comment

“Managers do things right; leaders do the right things”.  In the current environment, where the “right things” of new products, customers and deals are on hold, the best leadership may lie in prioritizing existing operations.  In essence, prioritization is choosing to “do the right things” within the existing portfolio of activities.

Prioritization begins with the calculation of net benefits.  Maximizing benefits or minimizing costs is insufficient.  Priorities reside in those activities with the greatest net benefits.  This can be defined as benefits minus costs, as a payback period or as return on investment (ROI) or net present value (NPV) for large projects.  The comparison of costs and benefits is the essence of this approach.  Calculating risk-adjusted discounted values of after-tax cash flows within an asset portfolio is usually just “nice to have”.  Rank ordering available projects by their net benefits is the next greatest source of value.

The Pareto Principle says that 80% of net benefits are delivered by 20% of activities.  Mathematically, with any reasonable range of costs and benefits, this relationship holds true.  In simplest terms, the Pareto Principle says “cut off the tail”.  It also focuses on the concept of relative value.  We want to compare the ratio of benefits to costs, investments or activity. 

This applies to time management, where a log of time for one month reveals 10% of activities that should be eliminated.  The bottom 10% of products, product categories, stores, bank and library branches face the same indication that they are not cost justified.  Customers, divisions and business units face the same reality.  Some make money, while others do not.  Activity based costing calculations indicate that the lowest performers cost the firm more than was apparent.  Even individual performance can/should be considered on a rank-ordered basis.  The bottom 5-10% should be identified annually and considered for performance improvement plans in every group of 10 or more employees.

In emergency situations, triage must be applied.  Limited resources must be applied ONLY to the activities that can benefit and survive.  Those which will fail receive no investment.  Those which will succeed anyway, receive no investment.

At times, a two-dimensional grid should be used to determine activities which will deliver benefits.  In the classic Boston Consulting Group approach, business units are categorized by high and low growth and margin potential.  The top right units with high growth and margin potential get all of the investments and high-powered managers’ attention.  Low growth and margin businesses face divestiture.  High margin, low growth businesses become the proverbial “cash cows”, generating cash flows to feed other units.

Opportunity cost is a fundamental concept in prioritizing opportunities.  There is no absolute scale of expected returns.  There is only the “next best alternative”.  Even when business units have poor prospects, they must be compared with the realistic opportunity costs of doing nothing or divestiture.

Prioritization does not apply just to eliminating the negative end of expected business results.  Investments should be made in those activities with the greatest potential.  The Gallup Strengthsfinder approach applies this to human performance, demonstrating that natural talents provide the greatest relative return.  Firms should invest in those products and markets with the greatest potential.  They should also invest in facilities, equipment, IT projects, researchers and sales staff who deliver incremental value.  Many firms are inappropriately constrained by ratios and potential future change management costs.  Investment and product portfolio managers understand that there is value in starving losers and investing in winners.

The most sophisticated version of prioritization is employed in the principle of comparative advantage.  David Ricardo’s theory of international trade applies to countries, companies and units.  Comparative advantage says that relative benefit/cost ratios between countries, firms and units determine the best possible distribution of production.  ONLY those who are comparatively most productive should produce goods or services.  More than a century later Michael Porter applied this to companies, determining that those with true core competencies would succeed in the long run. Treacy and Wiersma’s book on “The Discipline of Market Leaders” indicates that firms can only have competitive advantages in one of the three areas of product innovation, customer intimacy and operational excellence.  Only the “best of the best” will prevail in the long run.  Outsourcing of non-essential functions is indicated.

Given the clear economic advantages of prioritization, why is this not universally applied?  Net benefits, the Pareto Principle and comparative advantage are beyond the comprehension of some economic actors.  Comprehensive, systematic calculations are applied only by a specialized subset of firms and functions. 

Perhaps more important is the personal cost-benefit calculation of individuals.  I could prioritize activities by relative benefit-cost, but I would be subject to criticism for eliminating the bottom 10%.  Perhaps it is better to not “rock the boat” and avoid the penalties of change management.

Some sophisticated managers follow the advice of Dr. Deming who highlighted the great risks of overreacting to random variations.  Managers should set an appropriate time-frame when using relative performance measures.

Dr. Deming also preached that managers need to “drive out fear”. For some employees, any rank ordering or evaluation of performance creates fear.  Some individuals believe that people should not be subjected to performance standards or rankings because this is not “fair”.  For most organizations, the essential competitive nature of employment and corporations is understood and accepted. Highly risk-averse individuals should not be employed by firms which face competitive pressures.

This does not contradict Maslow’s theory that security/safety is at the base of employee motivation.  Security oriented individuals should be guided to careers and positions which meet their needs.  The other 80% of employees should be counseled to understand the long-term competitive nature of labor markets.

Prioritization is an effective and essential business strategy in all business conditions.

Building an Integrated Planning and Control System

tomkapostasyLeave a comment

In the process revolution since WWII, we have seen every business function discover that input-process-output descriptions of activities followed by a “say what you do, do what you say, be able to tell the difference” feedback structure are the key to long-run success.  Firms need to evaluate and consolidate these planning and control systems into a single fully integrated system, since they are all attempting to reach the same goals using the same tools.  There are at least five different sets of systems independently active in most firms today.

Strategic planning systems operate at the highest organizational level, attempting to evaluate the situation, set direction, identify critical success factors, define strategies and key performance indicators, and approve major investments and projects.  More evolved frameworks, like the balanced scorecard, attempt to link strategic goals to operational performance.  Many firms have learned to link strategy to measures and projects.

Modern financial planning and control systems have evolved for more than 100 years.  Strategic plans are translated into long-term financial plans to guide borrowing, investment, operations and risk analysis decisions.  The financial plan is translated into a negotiated annual budget.   A financial performance management system evaluates managers against business unit, department, product, customer and project goals.  The key transaction processes are defined and monitored.

Risk management has evolved to become a separate discipline apart from classic P&L management.  Regulatory compliance and external financial reporting have become more technical and legal.  Internal controls have moved to secondary and tertiary levels of safety with an emphasis on “defensible positions”.  Emergency preparedness and disaster recovery have developed into new disciplines.  Risk management tools have evolved from insurance policies to include hedges, contracts and outsourcing.

Human resources systems have grown to become parallel factors.  The regulatory side has greatly increased the emphasis on compliance and risk reduction.  HR performance management systems have become linked to business performance through SMART goals.  HR has been charged with helping managers professionally address frequent change management issues.  HR has also become a senior management partner in attempting to create cultural alignment.

The process or quality systems approach has been the greatest innovator.  At the highest level, a management or total quality management system attempts to incorporate all activities.  The quality approach requires clearly defined customer goals.  All processes must be defined and documented at the staff and system level.  Operations measures are defined to provide simple and direct feedback.  Quality goals are set and quality improvement is defined as a separate goal.  Processes are defined within the generic framework of product, sales and delivery.  IT systems are positioned as facilitators, requiring technical and user documentation.  Individual application systems become more complex, incorporating best practices, but allowing many exceptions.  Change management becomes a sub-discipline, with growing project management expertise.  Process changes are driven by re-engineering, kaizen and continuous process improvement efforts.

Ideally, a firm defines and operates a single planning and control system which integrates the strategic, financial, risk, human resources and quality management dimensions.  Failure to integrate these components leads to added costs, political conflicts, waste and missed opportunities.  A performance management cross-team with representatives from sales, product management, finance, HR and operations is needed to coordinate this effort.

There ARE many components.  We need to overcome the desire to have a fully integrated system that encompasses all possible components as exhibited by the US military in their Afghanistan plans.

http://www.nytimes.com/2010/04/27/world/27powerpoint.html

Goals of an Integrated Planning and Control System

tomkapostasyLeave a comment

The proliferation of planning and control systems has led to a large number of goals.  Fortunately, they can be consolidated and categorized to facilitate the development of an understandable consolidated system.  The essential goals are eternal, but the growing complexities of the business environment and processes have increased the number of goals worth monitoring.  On the planning side, firms need to prioritize, clarify, align, communicate and prepare. 

In spite of the countervailing winds of entrepreneurship and empowerment, in a dynamic world with greater value at stake, firms need to set key priorities at the top for direction, values, strategies, investments, projects, critical success factors and key performance indicators.  Without them, even in the best conditions, managers and staff will ineffectively make decisions “as well as they can”.  Clear priorities and expectations can significantly reduce the zero-sum game of internal politics.  Senior management needs to proactively clarify the priorities, trade-offs and commitments made to all stakeholders, including investors, customers, suppliers and internal departments. 

A well-designed strategic plan and its related structures effectively align the decentralized, specialized, outsourced, matrixed and virtual resources of today’s firm.  Intentions, decisions, opportunities, authorities and best practices are clearly communicated.  The well-defined expected and desired future state allows individual functions to optimize within their frameworks.  Long-term commitments are made and managed, allowing business units and functions to flex within the context and pursue immediate opportunities.  Commitments are made at every level at the right time, with confidence.  Scarce resources are devoted to priority objectives and secondary projects consume no resources.

An effective planning process prepares the firm to face the unknown.  Participants at all levels have devoted time to organization level thinking about direction, situation, gaps and solutions.  If simulations, sensitivity analysis and emergency preparedness work has been done, some level of preplanned formal responses and tools has been defined, providing a base and confidence for managing the challenges that were not expected.

On the controls side, the system needs to deliver results while managing assets and risks.

“What gets measured gets done”.  Objectives that are measured and reported receive priority management and staff attention.  Today’s digital dashboards expand the number of goals to be pursued and more clearly communicate their status to everyone in real-time.  This greatly increases the motivation by staff to improve their real performance (and sometimes beat the system).  The quality revolution attempts to move this feedback loop to a higher level, with staff understanding customer needs, defining their own goals, measuring performance and developing quantum leap improvements to serve easily understood definitions of success.

The accounting staff has always been charged with safeguarding the firm’s assets.  In the analog world, this was straightforward.  Today, it requires a deeper understanding of intangible assets such as patents, supplier relations and brand value.  In spite of the loss of firm loyalty, it is apparent today that employees are the most valuable assets for most firms.  Employees need to feel valued for their skills and contributions, and be given opportunities to build their skills and apply their talents.  The human resources management system (job descriptions, evaluations, compensation) needs to be effectively integrated into the overall planning system.  An effective process system also builds the knowledge management value of the firm by documenting processes, accumulating knowledge and improving the rate of knowledge transfer through training and sharing.

In the post-Enron, Sarbanes-Oxley informed world, risk management has become an important board level topic (because board members have new responsibilities).  Developing basic and advanced internal controls to prevent and detect theft is a classic controller responsibility.  Administrative policies and procedures have long been used in large and small firms to increase the degree of compliance with management’s expectations by managers and staff.  Most firms have been subject to some level of regulatory oversight, audit and compliance.  All firms have reported financial results to external stakeholders within generally accepted accounting practices and tax laws.  Firms have always thought about the risks of natural disasters, but today’s decentralized and electronically supported worlds require much more attention to a variety of 10%, 1% and 0.1% risks.  Firms have used insurance policies for basic risks for centuries, but today they must evaluate and guard against a much wider variety and degree of business risks.  Finally, complex and decentralized firms are subject to Murphy’s Law and the role of the weakest link.  The sheer number and impact of risks has caused them to make openness and transparency a top value.

An integrated planning and control system needs to address all of these goals.  Planning must prioritize, clarify, align, communicate and prepare.  Reporting must deliver results while managing assets and risks.

Reverse Logistics

tomkapostasyLeave a comment

Reverse logistics is the orphaned step-child of many businesses.  The liability and recovery potential are often marginal.  Unit volume is too low for heavy automation.  The process is complex and touches many departments, often requiring “stop and go” judgments.  And, the process works backwards from everything else the firm does.  Nonetheless, it is a necessary business function that can be managed using familiar financial and quality guidelines.

  1. Make sure that the returns and testing process captures the essential data for the quality process to reduce the root cause sources of product and fulfillment errors.
  2. Integrate returns processing with supplier management programs, holding suppliers responsible for returns rates above agreed upon levels.
  3. Don’t throw good money after bad.  Implement a “destroy in field” program for those lower unit cost items which don’t warrant evaluation, testing and recovery efforts.
  4. Simplify decisions to the extent possible.  Initial inspections should follow a triage process.  Testing should focus on final “yes/no” parameters.  Repairs should be limited to a few well-defined replacement steps.
  5. Pre-define the allowable recovery steps by product or product family.  If unit cost or dollar returns vary by more than a single order of magnitude, a rough cut categorization scheme can be used to define allowable routings and recovery actions.
  6. Define a simplified linear process flow.  Allowing too many options leads to wasted handling, scheduling and obsolescence.  Cost-effective product batching is usually not justified due to the low volume of returns. 
  7. Treat returns and recovery like any other operations process.  Define objectives and measure results.  Define, follow and improve processes.  Use simple, visual tools to facilitate the flow of product.
  8. Invest in people.  Match the skill and experience level to the potential recovery value.  Provide the training, materials and equipment to do the job well.
  9. Invest in recovery options.  For higher value products, repair, third-party services, return to manufacturer and parts salvage strategies may be cost-justified.
  10. Identify bottlenecks and design the process around them.  Packaging materials, test equipment, limited space, large returns batches, research requests, inventory and parts systems, complex products and resources shared with quality assurance or special projects can all create bottlenecks.  A good process eliminates some and works around the others.

 

The reverse logistics process needs a clean process re-engineering review about every five years and a quick review at least annually.  For businesses with 1-10% net margins, the returns process offers a material opportunity for improvement.

Universal Measure of Quality

tomkapostasyLeave a comment
               
 Table of Standard Quality Levels         
               
   Mean             
   Tasks       Errors       
   Between   Error   Quality   Per       
 Level   Errors   Rate   Rate      10,000  Color     
               
            4             16 6.3% 93.8%         625  Infrared     
            5             32 3.1% 96.9%         313  Red     
            6             64 1.6% 98.4%         156  Orange     
               
            7           128 0.8% 99.2%           78  Yellow     
            8           256 0.4% 99.6%           39  Green     
            9           512 0.2% 99.8%           20  Blue     
               
          10         1,024 0.10% 99.90%           10  Indigo     
          11         2,048 0.05% 99.95%             5  Violet     
          12         4,096 0.02% 99.98%             2  Ultraviolet     
               
 
             
 All quality assurance measures can use the standard scale, levels and colors 
 shown above. The levels reflect the exponential power of 2 required to achieve   
 a given mean time between errors. For example, quality level 4 reflects 1 error 
 every 16 tasks, as 16 is equal to 2 x 2 x 2 x 2, or 2 raised to the 4th power in   
 exponential notation.             
               
 Once a process measure has been defined and the process observed to be   
 “under control”, without wide swings in daily error rates or significant one time 
 events, then the average error rate can be determined.  This will set the current 
 quality level.  For example, if the observed error rate is 2.3%, then the quality   
 level is 5, as level 6 at 1.6% has not yet been attained.       
               
 Moving from one quality level to the next higher quality level requires the   
 process owner to cut the number of errors in half.  This applies to each upward 
 step.  In practice, process owners can typically move up one step every 2-4   
 months using standard root cause analysis tools.         
               
 Once the measure for a process has been defined and approved by   
 management, then the process owner reports on the monthly measured error   
 rate. A master table should be maintained showing the current quality level for 
 each defined process, and the first date at which each level was achieved.   
               
 While the ultimate goal of any process is zero defects or errors, this   
 pragmatic, incremental approach has been shown to be most effective in   
 helping front-line staff members to own and improve their processes through   
 time.               
               
 Most unmeasured processes operate at quality level 4, with a 5-7% error rate.  
 Once a process is measured, the error rate usually drops to 3-4% very quickly, 
 at quality level 5.  Once a staff member is assigned responsibility, the move to 
 quality level 6 and a 2% error rate soon follows.  These first improvements can 
 usually be done by using common sense and a little more attention. Process   
 steps are usually documented and performed consistently at this level.   
               
 Moving to level 7 and an error rate below 1% is typically much more   
 challenging.  Staff members usually need to record the details of each error   
 and analyze the errors in a time period such as a week or a month in order to   
 identify the largest cluster of problems.  At this stage, the bottleneck   
 identification and elimination techniques described in “The Goal” are very   
 useful.  Identifying the type of error, the person, the product, the time of day,   
 the machine or other sources of variability commonly leads to rapid   
 identification of the greatest problem area.  Eliminating the bottleneck can   
 often be done through manual process changes, retraining, device calibration, 
 more frequent measurements, and changes in user settings.  While computer 
 system changes may be identified at this stage, it is best to attempt to use   
 manual changes first, until these have been exhausted.     
               
 Reaching the Yellow level of stage 7 merits some celebration.  Reducing errors 
 to below one in one hundred is an important milestone.  At this point, the   
 number of errors has been cut in half 3 times for an overall reduction of 85%.    
 Fully 5 out of every 6 errors that originally occurred have been eliminated for   
 good.  Some simple processes can move straight to level 7 within a few weeks 
 or months.  It is important for staff members not to became disappointed when 
 they do more of the same good actions, but “hit the wall”, and are unable to   
 move forward as quickly, if at all, at some point.  This is normal, but there are   
 always ways to go over, around or through the wall.       
               
 The progression to Green level 8 and Blue level 9 typically requires the   
 application of more advanced quality techniques and/or the revision of   
 computer systems.  For many processes, the Kaizen approach to rapid   
 process revision can work here.  The introduction of poke yoke or failsafe   
 devices, steps, and specialized tools is appropriate here.  Moving repetitive   
 tasks to the computer is common at this time.  Staff members should have   
 been trained in quality concepts, including the basic ISO tenets of say what   
 you do, do what you say, and be able to tell the difference.  Staff members   
 should be performing all of their own measurements.  Reliance on final   
 inspection should be diminishing, as staff work quality control steps into their   
 core process.             
               
 Until a process has reached Green level 8, it is typically unwise to attempt to   
 change the underlying customer service level that is desired.  Attempting to   
 reduce a service cycle time from 14 days to 10 days when a process is not at 
 least at level 8, is likely to lead to a reversion back 2 or 3 quality levels,   
 thereby offsetting the benefit of greater speed with lower reliability.     
               
 For most processes and customers, Blue level 9, with one error for every 512   
 transactions, is at or below the threshold of materiality.  Staff members should 
 be encouraged to apply their skills to move to the next level, but be warned   
 that further improvements often require additional invest- ments in equipment,   
 computer systems or a total process re-engineering effort, including adjacent   
 processes, suppliers and customers.  Staff members should focus their   
 attention on any processes which remain at levels 4-7, before they pursue level 
 10, where errors occur once in every 1,024 transactions.  This level is usually   
 reached by front line staff with 3 or more years of quality management   
 experience or those with access to quality specialists.