Tag: modular

Managing the Tail in Operations and Product Development

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Marketers and investors have recently discovered the importance of “the tail” in distributions of opportunities, results and risks.  Virtual organizations, micro-marketing and web-based access to tiny clusters of customers has allowed start-up firms to profitably sell products to in truly niche markets.  Nassim Taleb’s book titled “The Black Swan” alerted investors to the rare events with large impacts which are not well-managed by modern portfolio theory and its attendant financial instruments.  Wise investors now consider the impact of once in a generation or once every century type events. 

As processes, product differentiation and product complexity grew following the mass market global recovery of the 1950’s and 1960’s, operations manager and engineers have increasingly faced greater challenges and opportunities “managing the tail”.  Early information technology forced companies to document and standardize their core business processes.  This automation helped companies to see their self-imposed administrative limits and explore computer assisted processes to handle all possibilities.  Product differentiation was pursued for every customer group and product dimension, creating sales, production, quality and support issues.  As customers received more options, higher quality, lower prices and shorter lead-times, they were NOT satisfied, but asked for MORE. 

Managers and engineers found that working in the tail became increasingly more difficult, costly and sometimes just plain impossible.  The number of combined options in production, assembly, catalogs, project steps, flowcharts and diagnostic guides approached infinity due to the potential combinations and permutations.  The challenge of identifying and resolving opportunities increased as remaining failure rates in quality, repairs, out of stock position or on-time shipping fell from 1 in 50 to 1 in 100 to 1 in 500 to 1 in 1,000 to 1 in 5,000 towards the gloriously named six sigma level (2%, 1%, 0.2%, 0.1%, 0.05% …).

In general, an army of scientifically oriented quality, business, marketing, financial, IT and engineering analysts have addressed these opportunities as complexity has risen and customer demands have increased.  Along the way, the quality paradigm was defined, setting zero defects, variability, travel, inventory, waiting and waste as eternal goals.  The financial paradigm’s focus on limiting costly investments to obtain small benefits acted as a resistor throughout this period.  

As organizations have moved deep into the tail for their IT and product development, operations and reverse logistics processes, conflict has become more common.  Analysts and process owners understand the trend and know that eventually any error, combination or possibility will be required by an internal or external customer.  They hate disorder and doing things twice.  They enjoy describing processes, diagnosing problems, designing and implementing complex processes, at whatever cost.  Their product development, IT and operations managers and directors, backed up by finance, tend to focus on the short-run, employ cost-benefit analysis and value compliance with project deadlines and budgets as higher goals.  The conflicts can be gentle comments, indirect negotiations or all out wars.

All of the players agree that demands for systems to handle more complex options with near perfect results will continue to grow.  They differ in how they value the short-run and the long-run.  While the financial paradigm develops a payback period or ROI based upon “solid” financial estimates for 5-10 years, the quality paradigm employs an infinite time horizon where infinitesimal improvements have subjectively valued importance as customer satisfaction, market share or risk management benefits.  As quality guru Dr. Deming said, the most important benefits are “unknown and unknowable”.  Hence, the two approaches are fundamentally incompatible.

Managers should take a number of general and specific steps to manage these situations, especially since they involve highly skilled, compensated and critical resources.  First, help the participants to understand the financial and quality paradigms.  Help them to see that the finance paradigm has great short-term applicability and is no going to be subsumed by the quality paradigm.  Teach staff members to deeply understand the quality paradigm, the transformation it has facilitated in global business and its contribution to long-run success in a consumer driven world. 

Second, encourage functional and project team members to alternately apply both paradigms to specific situations.  Either can help to trigger break-through solutions or to find an obvious next improvement level.

Third, reinforce with staff members the need to have functional hierarchical structures, process improvement resource plans and project management as tools to manage the improvement effort.  Front line staff and analysts may have the best ideas, but they need to be administratively coordinated by managers.  Even in the most dynamic, entrepreneurial environment, there is some need for structure.  Managers and staff can debate the right overall level or need for exceptions, but they need to appreciate the need for limits and ultimate decision-makers when conflicts can not be resolved.

Fourth, help staff to see the long-run commitment to improvements.  Cutting errors in half today, rather than pursuing a 90% reduction, is not a failure, it is a win.  The organization will be back to this process in 3 or 5 or 7 years, with new tools and customer demands, again analyzing 50%, 90% and 99% improvement paths.  Decisions to accept “good enough” are part of the long-run improvement process.

Fifth, employ the best practices of product development, diagnosis, problem solving and project management to reduce variability and meet goals in cost-effective ways.  With 50 years of experience, professionals have found great approaches that can be broadly applied.

Managing the tail of operations processes is an increasingly important role for managers and analysts.  Greater variety and consumer demand makes it ever more challenging to resolve issues or to know when to stop pursuing them.  Teaching staff to understand the complementary roles of the financial and quality paradigms and providing them with best practices tools helps them to produce cost-effective results.

Tools for Managing the Tail

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Managers and analysts who develop and improve products, systems and processes increasingly manage activities in the tail of near-perfect delivery expectations and stunning complexity.  In addition to understanding the finance and quality contexts of their functions, they can manage the tail by simplifying processes and problems, reducing goals and options, optimizing within constraints and monitoring non-critical activities.

Simplify Processes and Problems

  1. Modularize components to reduce the number of processes, flows and points of failure.  Reduce the points of contact between modules.
  2. Incorporate self-testing features to make component outputs fail-safe (poke yoke).
  3. Use a greater common denominator approach to combine options and provide just the higher value option.
  4. Separate A, B, C and D volume/variability items into focused factory, modular production, job shop and true custom flows.  Move D volume processes completely out of the system if required.
  5. Side-track complex evaluation steps to allow human expert consideration.
  6. Require incompatible orders or requests to be split and handled separately.
  7. Design processes to allow them to start again or reboot to eliminate truly random circumstances or operator error.

 

Reduce Goals and Options

  1. Set a short-term level of imperceptible defects or same level as the competition.  Use this to guide short-run choices.
  2. Reduce the number of customer goals from a dozen to six or two or one.  As demonstrated in Eli Goldratt’s book “The Goal”, this can simplify and motivate for long-run improvements.
  3. Use marketing research and Pareto analysis to determine the limits of perceptible differences and material goals.
  4. Incentivize customers to accept achievable goals and options by offering discounts, features, benefits and service.
  5. Leverage IT, technical, safety and regulatory limits to reduce options.

 

Optimize Within Constraints

  1. Set a project scope and resource budget.  Rank order initiatives and deliver within the time allowed.
  2. Simulate processes to determine the probability of occurrence and use this to eliminate low-frequency events from analysis.
  3. Apply best diagnosis practices for intermittent failures.  Set time limits.  Escalate to world-class experts. Set time and dollar limits.
  4. Limit the complexity of the system to a one-page flow-chart.

 

Monitor Non-Critical Activities

  1. Document future improvement options in a project parking lot.
  2. Develop reports and processes to monitor known risk and problem areas to identify root causes or increased frequency of occurrence.

 

There are many other approaches used by experienced product developers, project managers and analysts.  The insights of each functional area can often be used in other functions.

Ch Ch Ch Changes

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The Baby Boomers may have digested more workplace changes (1970-2010) than any prior generation, moving from an industrial to a post-industrial, services, or virtual world.  The post-Civil War generation saw the initial transition from an agricultural to an industrial society (1880-1920).  Their grandchildren saw the full flowering of the industrial world, with incredible advances in manufacturing, transportation and communications (1920-1960). 

Nearly every usual business practice or function in 1970 has been superseded or turned upside down in the last 4 decades.

The office world of 1970 looked much like 1920.  It was hierarchical, manual and rigid.  Secretaries assisted managers.  Typing, filing, shorthand and bookkeeping were essential skills.  Today, only a few senior execs or sales staff members have administrative or executive assistants.  Everyone else completes their own clerical functions as an integral part of work.  Paper ledger forms and 10-key adding machines have been replaced by Enterprise Resource Planning (ERP) systems in even the smallest firms.  QuickBooks offers capabilities that were unimaginable in 1970.

Mainframe computers automated high volume transaction and office tasks in large firms in 1970.  Computers have since expanded to touch every function, moving through minicomputer, PC, network and cloud phases.  Sophisticated applications exist today for every function and industry, including a dozen end-user tools such as spreadsheets, databases, word processing and collaboration/time/task management.

Communications has progressed from rotary phones, party lines and PBX systems to WiFi, VOIP systems, wireless phones and personal digital assistants.  Media has progressed from AM transistor radios through 8-track and VHS tapes to disks, digital downloads, massively multiplayer games and social media entities.

Companies today pursue core competencies, partnerships and virtual structures in contrast with the old vertically integrated ideal or financial portfolios of conglomerates.  Firms are financed through a broad range of instruments and investors throughout their lives rather than with simple stocks, bonds and preferred stocks.

Companies today compete globally and engage in partnerships with suppliers, customers and competitors.  They also compete with suppliers, customers and competitors, including small entrepreneurial start-ups.

Support functions are more important today.  The Personnel function has become Human Resources.  Marketing has assumed a strategically important role in product development and sales management.  Finance is a strategic partner in decisions.  Many functions are outsourced.

Product development is managed through a gates and phases process.

Operations functions have been totally transformed.  Quality has evolved from a technical necessity to an organizing principle.  Processes shape decisions.  Variability and waste are shunned.  The near-perfection of Six Sigma is pursued and achieved.  Firms benchmark and copy best practices.  Forecast based push systems have been replaced with JIT pull systems, reducing inventories to zero and lot sizes to units of one.  Mass production has been replaced by a network of focused factories, modular manufacturing and outsourcing.

Strategic planning has migrated from an infrequent fully integrated top-down approach to an iterative  process that massages top-down and bottom-up factors within a balanced scorecard composed of assets, operations, stakeholders and final goals. 

Suppliers are managed as long-term partners, instead of short-term contractors.  Staff members are treated as partners, even though company and staff initiated turnover is much higher.  Simplistic theory X and Y approaches (employees are good or bad) have evolved into situational leadership type approaches that match task/people dimensions to current needs. 

These generic changes have occurred seen in every industry and function, layered on top of the major technical and professional progress seen in each area. We are rapidly approaching a time when virtual organizations are a reality because they are more effective than forms suited to an industrial era.  Baby Boomers have experienced this whole cycle of change and are well situated to mange the final transitions.

Production Strategy

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Financial success often depends upon making wise strategic and structural decisions.  The Pareto Principle or ABC rule says that 20% of a firm’s products will deliver 80% of its volume or profit.  For most organizations, on a purely mathematical basis, some version of the Pareto Principle will hold true.  It may be 10% or 33% of the products accounting for most of the results, but this clustering is nearly universal.  Focusing on those activities that provide the greatest “bang for the buck” is a good strategic and tactical approach to business.

Production methods (including services) can also be classified into ABC categories.  The oldest method: custom or handicraft production can be labeled C.  The big breakthrough of standardized parts and mass production can be labeled A.  The hybrid products delivered by modular stages as in an assembly line can be labeled B.  Again, most organizations find themselves with a combination of mass (A), modular (B) and custom (C) produced goods. 

Since mass production has inherent advantages and is the lowest cost approach, firms should add modular products when the incremental benefits outweigh the costs.  Moving to the custom level involves the same benefit/cost comparison.  The incremental percentage margin is set by the marketplace and tends to decline through time as competitors add similar products, better features and benefits are offered and processes are refined and costs removed.   Sales and product managers will usually overestimate the margin benefits, while finance and production managers will underestimate them.  On the marginal cost side, the roles will often be reversed. 

The relative benefits and costs will vary from case to case, but the general structure and decisions will always need to be addressed.  In order to generate higher margins, firms need to offer products which appear to have greater custom appeal and this requires additional costs.  Firms which neglect to evaluate these trade-offs or which allow case by case negotiations often find that they have too many custom products and too little profit — or too few value-added products and too few customers.

There are four strategic approaches to this inherent trade-off.  First, firms can be disciplined and choose just one of the 3 production types.  They can deliver goods in a narrow range (A), using focused factory techniques.  As Henry Ford said, “any color you want as long as it’s black”.  They can adopt an operational excellence strategy and reduce costs through time.  Or, they can develop a modular strategy with well-defined processes for production, product development and marketing (B).  By leveraging the efficiencies of a set of highly effective modular processes, they can deliver new products and services at moderate volume with higher margins.  A product innovation strategy can be delivered this way.  Finally, they can choose a customized production strategy (C) and deliver highest margin niche products to specialized users.  This approach can attempt to leverage mass or modular production, but the real focus is on developing or adapting products to meet specialized needs.  This fits best with the customer intimacy strategy.

Unfortunately, the explosion of product choices in the 1970’s and 1980’s resulted in most firms delivering some messy, unintended combination of A, B and C products.  The mass production world moved from 90% A and a little B to 50% A, 40% B and 10% C in many cases.  Some firms even found one-third each as their production profile.  A second overall strategy has been to outsource the production of A level mass production items to the lowest cost source: in a focused factory, to a market leader, as an import, as a drop ship or through a partner.  A third strategy is to develop a truly modular production line ala Dell and move all production through a single highly refined process.  A fourth strategy is to outsource the customized work to partner firms, IT implementation shops, other engineering firms or to repackaging firms.

It is possible to combine mass, modular and custom product deliver flows within a single firm, but it is not easy.  At a minimum, firms need to make decisions in these terms, monitor the results and adapt to ensure that the marginal benefits justify the marginal costs.